Item 1. Financial Statements
VERTEX ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except number of shares and par value)
(UNAUDITED)
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| | June 30,
2022 | | December 31,
2021 |
| ASSETS | | | |
| Current assets | | | |
| Cash and cash equivalents | $ | 97,914 | | | $ | 36,130 | |
| Restricted cash | 100 | | | 100,497 | |
| Accounts receivable, net | 90,854 | | | 5,297 | |
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| Inventory | 201,752 | | | 3,736 | |
| Derivative commodity asset | — | | | 96 | |
| Prepaid expenses and other current assets | 36,627 | | | 4,280 | |
| Assets held for sale, current | 92,494 | | | 84,116 | |
| Total current assets | 519,741 | | | 234,152 | |
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| Fixed assets, at cost | 116,722 | | | 13,811 | |
| Less accumulated depreciation | (4,475) | | | (2,045) | |
| Fixed assets, net | 112,247 | | | 11,766 | |
| Finance lease right-of-use assets | 44,373 | | | — | |
| Operating lease right-of use assets | 4,768 | | | 5,011 | |
| Intangible assets, net | 8,375 | | | 359 | |
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| Other assets | 1,159 | | | 14,772 | |
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| TOTAL ASSETS | $ | 690,663 | | | $ | 266,060 | |
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| LIABILITIES, TEMPORARY EQUITY, AND EQUITY | | | |
| Current liabilities | | | |
| Accounts payable | $ | 50,652 | | | $ | 4,216 | |
| Accrued expenses | 30,560 | | | 3,618 | |
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| Finance lease liability-current | 652 | | | 302 | |
| Operating lease liability-current | 953 | | | 960 | |
| Current portion of long-term debt, net | 1,927 | | | 2,413 | |
| Obligations under inventory financing agreements, net | 172,857 | | | — | |
| Derivative commodity liability | 46,536 | | | — | |
| Liabilities held for sale, current | 35,507 | | | 37,645 | |
Total current liabilities | 339,644 | | | 49,154 | |
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| Long-term debt, net | 135,332 | | | 114 | |
| Finance lease liability-long-term | 44,640 | | | — | |
| Convertible senior unsecured note 2027, net | 41,543 | | | 64,016 | |
| Operating lease liability-long-term | 3,816 | | | 4,052 | |
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| Derivative warrant liability | 26,615 | | | 75,211 | |
| Other liabilities | 1,378 | | | — | |
| Total liabilities | 592,968 | | | 192,547 | |
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| COMMITMENTS AND CONTINGENCIES (Note 3) | — | | | — | |
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| | June 30,
2022 | | December 31,
2021 |
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| TEMPORARY EQUITY | | | |
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Redeemable non-controlling interest | — | | | 43,447 | |
| Total temporary equity | — | | | 43,447 | |
| EQUITY | | | |
50,000,000 of total Preferred shares authorized: | | | |
Series A Convertible Preferred Stock, $0.001 par value; 5,000,000 shares designated, zero and 385,601 shares issued and outstanding at June 30, 2022 and December 31, 2021, with a liquidation preference of $0 and $574,545 at June 30, 2022 and December 31, 2021. | — | | | — | |
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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; 75,509,002 and 63,287,965 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively. | 76 | | | 63 | |
| Additional paid-in capital | 278,455 | | | 138,620 | |
| Accumulated deficit | (182,588) | | | (110,614) | |
| Total Vertex Energy, Inc. shareholders' equity | 95,943 | | | 28,069 | |
| Non-controlling interest | 1,752 | | | 1,997 | |
| Total equity | 97,695 | | | 30,066 | |
| TOTAL LIABILITIES, TEMPORARY EQUITY, AND EQUITY | $ | 690,663 | | | $ | 266,060 | |
See accompanying notes to the consolidated financial statements.
VERTEX ENERGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(UNAUDITED)
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| | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | | 2022 | | 2021 | | 2022 | | 2021 |
| Revenues | | $ | 991,839 | | | $ | 30,228 | | | $ | 1,032,056 | | | $ | 55,273 | |
| Cost of revenues (exclusive of depreciation and amortization shown separately below) | | 984,442 | | | 28,041 | | | 1,023,008 | | | 50,850 | |
| Depreciation and amortization attributable to costs of revenues | | 3,122 | | | 116 | | | 3,236 | | | 228 | |
| Gross profit | | 4,275 | | | 2,071 | | | 5,812 | | | 4,195 | |
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| Operating expenses: | | | | | | | | |
Selling, general and administrative expenses | | 36,641 | | | 4,177 | | | 45,423 | | | 7,035 | |
| Depreciation and amortization attributable to operating expenses | | 763 | | | 27 | | | 790 | | | 54 | |
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| Total operating expenses | | 37,404 | | | 4,204 | | | 46,213 | | | 7,089 | |
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| Loss from operations | | (33,129) | | | (2,133) | | | (40,401) | | | (2,894) | |
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| Other income (expense): | | | | | | | | |
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| Interest income | | 18 | | | — | | | 18 | | | — | |
| Other income | | 152 | | | 4,222 | | | 625 | | | 4,223 | |
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| Loss on change in value of derivative warrant liability | | (945) | | | (21,508) | | | (4,524) | | | (23,288) | |
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| Interest expense | | (47,722) | | | (139) | | | (51,952) | | | (251) | |
| Total other expense | | (48,497) | | | (17,425) | | | (55,833) | | | (19,316) | |
| Loss from continuing operations before income tax | | (81,626) | | | (19,558) | | | (96,234) | | | (22,210) | |
| Income tax benefit (expense) | | — | | | — | | | — | | | — | |
| Loss from continuing operations | | (81,626) | | | (19,558) | | | (96,234) | | | (22,210) | |
| Income from discontinued operations, net of tax (see note 16) | | 17,844 | | | 3,601 | | | 31,643 | | | 9,219 | |
| Net loss | | (63,782) | | | (15,957) | | | (64,591) | | | (12,991) | |
| Net income attributable to non-controlling interest and redeemable non-controlling interest from continuing operations | | 165 | | | 243 | | | 97 | | | 626 | |
| Net income attributable to non-controlling interest and redeemable non-controlling interest from discontinued operations | | 3,023 | | | 3,175 | | | 6,829 | | | 4,783 | |
| Net loss attributable to Vertex Energy, Inc. | | (66,970) | | | (19,375) | | | (71,517) | | | (18,400) | |
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| Accretion of redeemable noncontrolling interest to redemption value from continued operations | | (6) | | | (387) | | | (428) | | | (762) | |
| Accretion of discount on Series B and B1 Preferred Stock | | — | | | (284) | | | — | | | (507) | |
| Dividends on Series B and B1 Preferred Stock | | — | | | — | | | — | | | 258 | |
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| Net loss attributable to shareholders from continuing operations | | (81,797) | | | (20,472) | | | (96,759) | | | (23,847) | |
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| Net income attributable to shareholders from discontinued operations, net of tax | | 14,821 | | | 426 | | | 24,814 | | | 4,436 | |
| Net loss attributable to common shareholders | | $ | (66,976) | | | $ | (20,046) | | | $ | (71,945) | | | $ | (19,411) | |
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| Basic income (loss) per common share | | | | | | | | |
| Continuing operations | | $ | (1.20) | | | $ | (0.39) | | | $ | (1.47) | | | $ | (0.48) | |
| Discontinued operations, net of tax | | 0.22 | | | 0.01 | | | 0.38 | | | 0.09 | |
| Basic income (loss) per common share | | $ | (0.98) | | | $ | (0.38) | | | $ | (1.09) | | | $ | (0.39) | |
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| Diluted income (loss) per common share | | | | | | | | |
| Continuing operations | | $ | (1.20) | | | $ | (0.39) | | | $ | (1.47) | | | $ | (0.48) | |
| Discontinued operations, net of tax | | 0.22 | | | 0.01 | | | 0.38 | | | 0.09 | |
| Diluted income (loss) per common share | | $ | (0.98) | | | $ | (0.38) | | | $ | (1.09) | | | $ | (0.39) | |
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| Shares used in computing earnings per share | | | | | | | | |
| Basic | | 67,923 | | | 52,683 | | | 65,660 | | | 50,210 | |
| Diluted | | 67,923 | | | 52,683 | | | 65,660 | | | 50,210 | |
See accompanying notes to the consolidated financial statements.
VERTEX ENERGY, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(in thousands, except par value)
(UNAUDITED)
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| Six Months Ended June 30, 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 | 63,288 | | | $ | 63 | | | 386 | | | $ | — | | | — | | | $ | — | | | $ | 138,620 | | | $ | (110,614) | | | $ | 1,997 | | | $ | 30,066 | |
| Exercise of options | 60 | | | — | | | — | | | — | | | — | | | — | | | 76 | | | — | | | — | | | 76 | |
| Exercise of warrants | 1,113 | | | 1 | | | — | | | — | | | — | | | — | | | (1) | | | — | | | — | | | — | |
| Share based compensation expense | — | | | — | | | — | | | — | | | — | | | — | | | 250 | | | — | | | — | | | 250 | |
| Conversion of Series A Preferred stock to common | 5 | | | — | | | (5) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Reclassification of derivative liabilities | — | | | — | | | — | | | — | | | — | | | — | | | 78,789 | | | — | | | — | | | 78,789 | |
| Accretion of redeemable non-controlling interest to redemption value | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (422) | | | — | | | (422) | |
| Net income (loss) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (4,547) | | | 3,739 | | | (808) | |
| Less: amount attributable to redeemable non-controlling interest | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (3,769) | | | (3,769) | |
| Balance on March 31, 2022 | 64,466 | | | 64 | | | 381 | | | — | | | — | | | — | | | 217,734 | | | (115,583) | | | 1,967 | | | 104,182 | |
| Exercise of options to common | 498 | | | 1 | | | — | | | — | | | — | | | — | | | 553 | | | — | | | — | | | 554 | |
| Exercise of options to common- unissued | — | | | — | | | — | | | — | | | — | | | — | | | 3 | | | — | | | — | | | 3 | |
| Distribution to noncontrolling shareholder | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (380) | | | (380) | |
| Adjustment of redeemable non controlling interest | — | | | — | | | — | | | — | | | — | | | — | | | 29 | | | (29) | | | — | | | — | |
| Conversion of Convertible Senior Notes to common | 10,164 | | | 10 | | | — | | | — | | | — | | | — | | | 59,812 | | | — | | | — | | | 59,822 | |
| Share based compensation expense | — | | | — | | | — | | | — | | | — | | | — | | | 324 | | | — | | | — | | | 324 | |
| Conversion of Series A Preferred stock to common | 381 | | | 1 | | | (381) | | | — | | | — | | | — | | | — | | | — | | | — | | | 1 | |
| Accretion of redeemable non-controlling interest to redemption value | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (6) | | | — | | | (6) | |
| Net loss | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (66,970) | | | 3,188 | | | (63,782) | |
| Less: amount attributable to redeemable non-controlling interest | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (3,023) | | | (3,023) | |
| Balance on June 30, 2022 | 75,509 | | | $ | 76 | | | — | | | $ | — | | | — | | | $ | — | | | $ | 278,455 | | | $ | (182,588) | | | $ | 1,752 | | | $ | 97,695 | |
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See accompanying notes to the consolidated financial statements.
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| Six Months Ended June 30, 2021 |
| Common Stock | | Series A Preferred | | Series C Preferred | | | | | | | | |
| | Shares | | $0.001 Par | | Shares | | $0.001 Par | | Shares | | $0.001 Par | | Additional Paid-In Capital | | Retained Earnings | | Non-controlling Interest | | Total Equity |
| Balance on January 1, 2021 | 45,555 | | | $ | 46 | | | 420 | | | $ | — | | | — | | | $ | — | | | $ | 94,570 | | | $ | (90,009) | | | $ | 1,318 | | | $ | 5,925 | |
| Exercise of options | 23 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Exercise of B1 warrants | 1,080 | | | 1 | | | — | | | — | | | — | | | — | | | 2,757 | | | — | | | — | | | 2,758 | |
| Exchanges of Series B Preferred stock to common | 2,359 | | | 2 | | | — | | | — | | | — | | | — | | | 4,114 | | | 630 | | | — | | | 4,746 | |
| Share based compensation expense | — | | | — | | | — | | | — | | | — | | | — | | | 150 | | | — | | | — | | | 150 | |
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| Conversion of Series B Preferred stock to common | 638 | | | 1 | | | — | | | — | | | — | | | — | | | 1,978 | | | — | | | — | | | 1,979 | |
| Conversion of Series B1 Preferred stock to common | 2,087 | | | 2 | | | — | | | — | | | — | | | — | | | 3,254 | | | — | | | — | | | 3,256 | |
| Dividends on Series B and B1 | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (372) | | | — | | | (372) | |
| Accretion of discount on Series B and B1 | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (224) | | | — | | | (224) | |
| Accretion of redeemable non-controlling interest to redemption value | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (373) | | | — | | | (373) | |
| Net income | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 974 | | | 1,991 | | | 2,965 | |
| Less: amount attributable to redeemable non-controlling interest | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,542) | | | (1,542) | |
| Balance on March 31, 2021 | 51,742 | | | 52 | | | 420 | | | — | | | — | | | — | | | 106,823 | | | (89,374) | | | 1,767 | | | 19,268 | |
| Exercise of options to common | 505 | | | — | | | — | | | — | | | — | | | — | | | 229 | | | — | | | — | | | 229 | |
| Exercise of options to common- unissued | — | | | — | | | — | | | — | | | — | | | — | | | 475 | | | — | | | — | | | 475 | |
| Leverage Lubricants contribution | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (13) | | | (13) | |
| Exercise of B1 warrants | 157 | | | — | | | — | | | — | | | — | | | — | | | 1,634 | | | — | | | — | | | 1,634 | |
| Exercise of B1 warrants-unissued | — | | | — | | | — | | | — | | | — | | | — | | | 1,186 | | | — | | | — | | | 1,186 | |
| Share based compensation expense | — | | | — | | | — | | | — | | | — | | | — | | | 205 | | | — | | | — | | | 205 | |
| Conversion of Series A Preferred stock to common | 28 | | | — | | | (28) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Conversion of Series B Preferred stock to common | 1,842 | | | 2 | | | — | | | — | | | — | | | — | | | 5,707 | | | — | | | — | | | 5,709 | |
| Conversion of Series B Preferred stock to common-unissued | — | | | — | | | — | | | — | | | — | | | — | | | 760 | | | — | | | — | | | 760 | |
| Conversion of Series B1 Preferred stock to common | 5,635 | | | 6 | | | — | | | — | | | — | | | — | | | 8,785 | | | — | | | — | | | 8,791 | |
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| Accretion of discount on Series B and B1 | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (284) | | | — | | | (284) | |
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| Accretion of redeemable non-controlling interest to redemption value | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (387) | | | — | | | (387) | |
| Net loss | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (19,375) | | | 3,418 | | | (15,957) | |
| Less: amount attributable to redeemable non-controlling interest | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (3,113) | | | (3,113) | |
| Balance on June 30, 2021 | 59,909 | | | $ | 60 | | | 392 | | | $ | — | | | — | | | $ | — | | | $ | 125,804 | | | $ | (109,420) | | | $ | 2,059 | | | $ | 18,503 | |
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See accompanying notes to the consolidated financial statements.
VERTEX ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(UNAUDITED)
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| | Six Months Ended | |
| | June 30,
2022 | | June 30,
2021 | |
| Cash flows from operating activities | | | | |
| Net loss | $ | (64,591) | | | $ | (12,991) | | |
| Income from discontinued operations, net of tax | 31,643 | | | 9,219 | | |
| Loss from continuing operations | (96,234) | | | (22,210) | | |
Adjustments to reconcile net loss from continuing operations to cash provided by
(used in) operating activities, net of acquisitions | | | | |
| Stock based compensation expense | 574 | | | 356 | | |
| Depreciation and amortization | 4,026 | | | 282 | | |
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| Gain on forgiveness of debt | — | | | (4,222) | | |
| Gain on sale of assets | (82) | | | (1) | | |
| Provision for environment clean up | 1,428 | | | — | | |
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| Increase (reduction) of allowance for bad debt | (12) | | | 620 | | |
| Increase in fair value of derivative warrant liability | 4,524 | | | 23,288 | | |
| Loss on commodity derivative contracts | 93,745 | | | 1,925 | | |
| Net cash settlements on commodity derivatives | (64,814) | | | (1,961) | | |
| Amortization of debt discount and deferred costs | 40,000 | | | — | | |
| Changes in operating assets and liabilities, net of acquisition | | | | |
| Accounts receivable and other receivables | (85,545) | | | (2,489) | | |
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| Inventory | (67,796) | | | (704) | | |
| Prepaid expenses and other current assets | (12,614) | | | 1,641 | | |
| Accounts payable | 46,399 | | | 2,890 | | |
| Accrued expenses | 26,891 | | | (217) | | |
| Other assets | (50) | | | (89) | | |
| Net cash used in operating activities from continuing operations | (109,560) | | | (891) | | |
| Cash flows from investing activities | | | | |
| Acquisition of business, net of cash | (227,525) | | | 2 | | |
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| Software purchase | (106) | | | — | | |
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| Purchase of fixed assets | (1,159) | | | (861) | | |
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| Proceeds from sale of fixed assets | 157 | | | 75 | | |
| Net cash used in investing activities from continuing operations | (228,633) | | | (784) | | |
| Cash flows from financing activities | | | | |
| Payments on finance leases | (107) | | | (134) | | |
| Proceeds from exercise of options and warrants to common stock | 632 | | | 2,829 | | |
| Distributions to noncontrolling interest | (380) | | | — | | |
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| Net borrowings on inventory financing agreements | 172,607 | | | — | | |
| Line of credit proceeds, net | — | | | 1,032 | | |
| Redemption of noncontrolling interest | (50,666) | | | — | | |
| Proceeds from note payable, net | 165,718 | | | — | | |
| Payments on note payable | (7,716) | | | (1,837) | | |
| Net cash provided by financing activities from continuing operations | 280,088 | | | 1,890 | | |
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| Discontinued operations: | | | | |
| Net cash provided by operating activities | 21,366 | | | 5,936 | | |
| Net cash used in investing activities | (1,578) | | | (1,961) | | |
| Net cash used in financing activities | (296) | | | (118) | | |
| Net cash provided by discontinued operations | 19,492 | | | 3,857 | | |
| | | | |
| Net change in cash, cash equivalents and restricted cash | (38,613) | | | 4,072 | | |
| Cash, cash equivalents, and restricted cash at beginning of the period | 136,627 | | | 10,995 | | |
| Cash, cash equivalents, and restricted cash at end of period | $ | 98,014 | | | $ | 15,067 | | |
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| SUPPLEMENTAL INFORMATION | | | |
| Cash paid for interest | $ | 11,438 | | | $ | 483 | |
| Cash paid for taxes | $ | — | | | $ | — | |
| NON-CASH INVESTING AND FINANCING TRANSACTIONS | | | |
| Equity component of the convertible note issuance | $ | 78,789 | | | $ | — | |
| | | |
| Conversion of Series B Preferred Stock into common stock | $ | — | | | $ | 8,447 | |
| Conversion of Series B1 Preferred Stock into common stock | $ | — | | | $ | 12,046 | |
| Exchanges of Series B Preferred Stock into common stock | $ | — | | | $ | 4,747 | |
| Accretion of discount on Series B and B1 Preferred Stock | $ | — | | | $ | 507 | |
| Dividends-in-kind accrued on Series B and B1 Preferred Stock | $ | — | | | $ | (258) | |
| | | |
| Conversion of Convertible Senior Notes to common stock | $ | 59,822 | | | $ | — | |
| Equipment acquired (disposed) under leases | $ | 45,096 | | | $ | 174 | |
| Accretion of redeemable noncontrolling interest to redemption value | $ | 428 | | | $ | 762 | |
| | | |
See accompanying notes to the consolidated financial statements.
VERTEX ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 Ohio”) (wholly-owned by HPRM, LLC, of which Vertex Energy currently owns a 100% interest)(“HPRM”), Cedar Marine Terminals, L.P. (“CMT”) (indirectly wholly-owned), and H & H Oil, L.P. (“H&H”) (indirectly wholly-owned)(collectively, the “Vertex Entities”, and together, Vertex, Vertex Operating and the Vertex Entities, the “Seller Parties”), as sellers, and Safety-Kleen Systems, Inc., as purchaser (“Safety-Kleen”). Pursuant to the Sale Agreement, the Company agreed to sell its used motor oil (UMO) business (the "UMO Business") to Safety-Kleen.
During the third quarter of 2021, the Company classified the UMO Business as held for sale based on management’s intention and the Company’s 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 that were 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 million. 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 (in thousands).
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
| Cash and cash equivalents | $ | 97,914 | | | $ | 36,130 | |
| Restricted cash | 100 | | | 100,497 | |
| Cash and cash equivalents and restricted cash as shown in the consolidated statements of cash flows | $ | 98,014 | | | $ | 136,627 | |
The Company has placed $100 thousand of restricted cash in a money market account, to serve as collateral for payment of a credit card. As of December 31, 2021, a total of $100 million of restricted cash was held in an escrow account in connection with the issuance of the convertible notes, which was 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 $1 million and $1 million at June 30, 2022 and December 31, 2021, respectively.
Inventory and Obligations Under Inventory Financing Agreements
Inventories of products consist of feedstocks, refined petroleum products and recovered ferrous and non-ferrous metals. Commodity inventories, excluding commodity inventories at the Mobile Refinery (defined and discussed below under “Note 14. Share Purchase, Subscription Agreements and Mobile Refinery Acquisition — Mobile Refinery Acquisition”), are stated at the lower of cost or net realizable value using the first in, first out (FIFO) accounting method. Commodity inventories at the Mobile Refinery are stated at the lower of cost or net realizable value using the weighted average inventory accounting method. We value merchandise along with spare parts, materials, and supplies at average cost. Estimating the net realizable value of our inventory requires management to make assumptions about the timing of sales and the expected proceeds that will be realized for these sales.
All of the crude oil utilized at the Mobile Refinery is financed by Macquarie Energy North America Trading Inc. ("Macquarie") under procurement contracts. The crude oil remains in the legal title of Macquarie and is stored in our storage tanks governed by a storage agreement. Legal title to the crude oil passes to us at the tank outlet. After processing, Macquarie takes title to the refined products stored in our storage tanks until they are sold to our retail locations or to third parties. We record the inventory owned by Macquarie on our behalf as inventory with a corresponding accrued liability on our balance sheet because we maintain the risk of loss until the refined products are sold to third parties and we have an obligation to repurchase it. The valuation of our repurchase obligation requires that we make estimates of the prices and differentials assuming settlement occurs at the end of the reporting period.
In connection with the consummation of the Mobile Acquisition (defined and discussed below under “Note 14. Share Purchase, Subscription Agreements and Mobile Refinery Acquisition — Mobile Refinery Acquisition”), the Company became a party to a Supply and Offtake Agreement with Macquarie. Under this arrangement, the Company purchases crude oil supplied from third-party suppliers and Macquarie provides credit support for certain of these purchases. Macquarie holds title to all crude oil and refined products inventories, except for liquefied petroleum gases or sulfur, at all times and pledges such inventories, together with all receivables arising from the sales of these inventories. The valuation of our terminal obligation requires that we make estimates of the prices and differentials for our then monthly forward purchase obligations.
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 six months ended June 30, 2022 and 2021.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (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. On April 1, 2022, the Company redeemed the non-controlling interest holder's interest of MG SPV, and on May 26, 2022, the Company redeemed the non-controlling interest holder's interest of Heartland SPV. 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.
Revenue Recognition
Our revenues are generated through the sale of refined petroleum products and terminalling and storage services. We recognize revenue from product sales at prevailing market rates at the point in time in which the customer obtains control of the product. Terminalling and storage revenues are recognized as services are rendered, and our performance obligations have been satisfied once the product has been transferred back to the customer. These services are short-term in nature, and the service fees charged to our customers are at prevailing market rates. The timing of our revenue recognition may differ from the timing of payment from our customers. A receivable is recorded when revenue is recognized prior to payment and we have an unconditional right to payment.
Environmental Matters
We accrue for losses associated with environmental remediation obligations when such losses are probable and reasonably estimable. The liability represents the expected costs of remediating contaminated soil and groundwater at the site. Costs of future expenditures for environmental remediation obligations are discounted to their present value.
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 June 30, 2022 and 2021 and for each of the six months then ended, the Company’s revenues and receivables were comprised of the following customer concentrations:
| | | | | | | | | | | | | | | | | | | | | | | |
| As of and for the Six Months Ended |
| | June 30, 2022 | | June 30, 2021 |
| % of
Revenues | | % of
Receivables | | % of
Revenues | | % of
Receivables |
| Customer 1 | 42% | | 1% | | 21% | | 14% |
| Customer 2 | 17% | | 18% | | 17% | | 20% |
| Customer 3 | 9% | | —% | | 16% | | 10% |
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For each of the six months ended June 30, 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 |
| Six Months Ended June 30, 2022 | | Six Months Ended June 30, 2021 |
| Black Oil | | Refining | | Recovery | | Black Oil | | Refining | | Recovery |
| Customer 1 | —% | | 43% | | —% | | —% | | 27% | | —% |
| Customer 2 | —% | | 18% | | —% | | —% | | —% | | 78% |
| Customer 3 | —% | | 9% | | —% | | —% | | 20% | | —% |
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The Company had one vendor that represented 70% and 59% of total purchases for the six months ended June 30, 2022 and 2021, respectively, and 73% and 69% of total payables at June 30, 2022 and 2021, respectively.
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 six months ended June 30, 2022 and 2021, we paid $382 thousand and $134 thousand, 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.
NOTE 4. REVENUES
Disaggregation of Revenue
The following tables present our revenues disaggregated by geographical market and revenue source (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2022 |
| Black Oil | | Refining & Marketing | | Recovery | | Total |
| Primary Geographical Markets | | | | | | | |
| | | | | | | |
| | | | | | | |
| Southern United States | $ | 20,254 | | | $ | 966,390 | | | $ | 5,195 | | | $ | 991,839 | |
| Sources of Revenue | | | | | | | |
| Gasolines | — | | | 255,909 | | | — | | | 255,909 | |
| Jet Fuels | — | | | 143,688 | | | — | | | 143,688 | |
| Diesel | — | | | 322,317 | | | — | | | 322,317 | |
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| Pygas | — | | | 20,685 | | | — | | | 20,685 | |
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| Oil collection services | 26 | | | — | | | — | | | 26 | |
| Metals | — | | | — | | | 4,318 | | | 4,318 | |
| Other refinery products | 666 | | | 72,460 | | | 877 | | | 74,003 | |
| VGO/Marine fuel sales | 19,562 | | | 151,331 | | | — | | | 170,893 | |
| Total revenues | $ | 20,254 | | | $ | 966,390 | | | $ | 5,195 | | | $ | 991,839 | |
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| Three Months Ended June 30, 2021 |
| Black Oil | | Refining & Marketing | | Recovery | | Total |
| Primary Geographical Markets | | | | | | | |
| | | | | | | |
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| Southern United States | $ | 155 | | | $ | 23,836 | | | $ | 6,237 | | | $ | 30,228 | |
| Sources of Revenue | | | | | | | |
| Gasolines | — | | | 6,083 | | | — | | | 6,083 | |
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| Diesel | — | | | 13,481 | | | — | | | 13,481 | |
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| Pygas | — | | | 3,862 | | | — | | | 3,862 | |
| Industrial fuel | — | | | 410 | | | — | | | 410 | |
| Oil collection services | 155 | | | — | | | — | | | 155 | |
| Metals | — | | | — | | | 6,151 | | | 6,151 | |
| Other refinery products | — | | | — | | | 86 | | | 86 | |
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| Total revenues | $ | 155 | | | $ | 23,836 | | | $ | 6,237 | | | $ | 30,228 | |
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| Six Months Ended June 30, 2022 |
| Black Oil | | Refining & Marketing | | Recovery | | Total |
| Primary Geographical Markets | | | | | | | |
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| Southern United States | $ | 21,804 | | | $ | 1,001,109 | | | $ | 9,143 | | | $ | 1,032,056 | |
| Sources of Revenue | | | | | | | |
| Gasolines | — | | | 263,458 | | | — | | | 263,458 | |
| Jet Fuels | — | | | 143,688 | | | — | | | 143,688 | |
| Diesel | — | | | 344,225 | | | — | | | 344,225 | |
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| Pygas | — | | | 25,375 | | | — | | | 25,375 | |
| Industrial fuel | — | | | 572 | | | — | | | 572 | |
| Oil collection services | 240 | | | — | | | — | | | 240 | |
| Metals | — | | | — | | | 7,733 | | | 7,733 | |
| Other refinery products | 666 | | | 72,460 | | | 1,410 | | | 74,536 | |
| VGO/Marine fuel sales | 20,898 | | | 151,331 | | | — | | | 172,229 | |
| Total revenues | $ | 21,804 | | | $ | 1,001,109 | | | $ | 9,143 | | | $ | 1,032,056 | |
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| Six Months Ended June 30, 2021 |
| Black Oil | | Refining & Marketing | | Recovery | | Total |
| Primary Geographical Markets | | | | | | | |
| | | | | | | |
| | | | | | | |
| Southern United States | $ | 278 | | | $ | 43,110 | | | $ | 11,885 | | | $ | 55,273 | |
| Sources of Revenue | | | | | | | |
| Gasolines | — | | | 10,494 | | | — | | | 10,494 | |
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| Diesel | — | | | 25,060 | | | — | | | 25,060 | |
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| Pygas | — | | | 6,835 | | | — | | | 6,835 | |
| Industrial fuel | — | | | 721 | | | — | | | 721 | |
| Oil collection services | 278 | | | — | | | 3 | | | 281 | |
| Metals | — | | | — | | | 11,796 | | | 11,796 | |
| Other refinery products | — | | | — | | | 86 | | | 86 | |
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| Total revenues | $ | 278 | | | $ | 43,110 | | | $ | 11,885 | | | $ | 55,273 | |
NOTE 5. ACCOUNTS RECEIVABLE
Accounts receivable, net, consists of the following at June 30, 2022 and December 31, 2021(in thousands):
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
| Accounts receivable trade | $ | 91,866 | | | $ | 6,297 | |
| Allowance for doubtful accounts | (1,012) | | | (1,000) | |
| Accounts receivable trade, net | $ | 90,854 | | | $ | 5,297 | |
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
The Company's outstanding debt facilities as of June 30, 2022 and December 31, 2021 are summarized as follows (in thousands):
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| Creditor | Loan Type | | | | | | | | Balance on June 30, 2022 | | Balance on December 31, 2021 |
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| Term Loan 2025 | Loan | | | | | | | | $ | 165,000 | | | $ | — | |
| John Deere Note | Note | | | | | | | | — | | | 93 | |
| AVT Equipment Lease-HH | Finance Lease | | | | | | | | — | | | 302 | |
| SBA Loan | SBA Loan | | | | | | | | 59 | | | 59 | |
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| VRA Finance Lease | Finance Lease | | | | | | | | 45,291 | | | — | |
| Various institutions | Insurance premiums financed | | | | | | | | 9,236 | | | 2,375 | |
| Principal amount of long-term debt and finance lease liabilities | | | | | | | | | 219,586 | | | 2,829 | |
| Less: unamortized discount and deferred financing costs | | | | | | | | | (37,035) | | | — | |
| Total debt, net of unamortized discount and deferred financing costs | | | | | | | | | 182,551 | | | 2,829 | |
| Less: current maturities, net of unamortized discount and deferred financing costs | | | | | | | | | (2,579) | | | (2,715) | |
| Long term debt and finance lease liabilities, net of current maturities | | | | | | | | | $ | 179,972 | | | $ | 114 | |
Future contractual principal maturities of notes payable as of June 30, 2022 are summarized as follows (in thousands):
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| Year Ended June 30, | | Amount Due |
| 2023 | | $ | 14,013 | |
| 2024 | | 9,514 | |
| 2025 | | 154,049 | |
| 2026 | | 1,605 | |
| 2027 | | 1,809 | |
| Thereafter | | 38,596 | |
| Total | | $ | 219,586 | |
Insurance Premiums
The Company financed insurance premiums through various financial institutions bearing interest rates from 3.24% to 4.09% per annum. All such premium finance agreements have maturities of less than one year and have a balance of $9.2 million at June 30, 2022 and $2.4 million at December 31, 2021.
Finance Leases
On April 1, 2022, the Company entered into one finance lease. Base payments are $0.4 million per month for the first six months, increasing to $0.5 million per month for the next 180 months. The amount of the right of use assets is $44.4 million at June 30, 2022, and the finance lease obligation is $45 million at June 30, 2022.
Term Loan
On April 1, 2022 (the “Closing Date”), Vertex Refining; the Company, as a guarantor; substantially all of the Company’s direct and indirect subsidiaries, as guarantors (together with the Company, the “Guarantors”); certain funds and accounts under management by BlackRock Financial Management, Inc. or its affiliates, as lenders (“BlackRock”), certain funds managed or advised by Whitebox Advisors, LLC, as lenders (“Whitebox”), certain funds managed by Highbridge Capital Management, LLC, as lenders (“Highbridge”), Chambers Energy Capital IV, LP, as a lender (“Chambers”), CrowdOut Capital LLC, as a lender (“CrowdOut Capital”), CrowdOut Credit Opportunities Fund LLC, as a lender (collectively with BlackRock, Whitebox, Highbridge, Chambers and CrowdOut Capital, the “Lenders”); and Cantor Fitzgerald Securities, in its capacity as
administrative agent and collateral agent for the Lenders (the “Agent”), entered into a Loan and Security Agreement (the “Loan and Security Agreement”).
Pursuant to the Loan and Security Agreement, the Lenders agreed to provide a $125 million term loan to Vertex Refining (the “Initial Term Loan”), the proceeds of which, less agreed upon fees and discounts, were held in escrow prior to the Closing Date, pursuant to an Escrow Agreement. On the Closing Date, net proceeds from the term loans, less the agreed upon fees and discounts, as well as certain transaction expenses, were released from escrow to Vertex Refining in an aggregate amount of $94 million.
On May 26, 2022, each of the Initial Guarantors (including the Company), Vertex Ohio, HPRM LLC, a Delaware limited liability company (“HPRM”), and Tensile-Heartland Acquisition Corporation, a Delaware corporation (“Tensile-Heartland”, and together with Vertex Ohio and HPRM, the “Additional Guarantors”, and the Additional Guarantors, together with the Initial Guarantors, the “Guarantors”, and the Guarantors, together with Vertex Refining, the “Loan Parties”), entered into an Amendment Number One to Loan and Security Agreement (“Amendment No. One to Loan Agreement”), with certain of the Lenders and CrowdOut Warehouse LLC, as a lender (the “Additional Lenders” and together with the Initial Lenders, the “Lenders”) and the Agent, pursuant to which, the amount of the Term Loan (as defined below) was increased from $125 million to $165 million, with the Additional Lenders providing an additional term loan in the amount of $40 million (the “Additional Term Loan”, and together with the Initial Term Loan, the “Term Loan”).
Pursuant to the Loan and Security Agreement, on the last day of March, June, September and December of each year (or if such day is not a business day, the next succeeding business day), beginning on March 31, 2023 and ending on December 31, 2024, Vertex Refining is required to repay $2 million of the principal amount owed under the Loan and Security Agreement (i.e., 1.25% of the original principal amount per quarter), subject to reductions in the event of any prepayment of the Loan and Security Agreement.
The Company used a portion of the proceeds from the Term Loan borrowing to pay a portion of the purchase price associated with the acquisition of the Mobile Refinery (defined below) 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.
Warrant Agreement and Derivative Liabilities
In connection with the Loan and Security Agreement, and as additional consideration for the Lenders agreeing to loan funds to the Company thereunder, the Company granted warrants to purchase 2.75 million shares of common stock of the Company to the Lenders (and/or their affiliates) on the Closing Date (the “Initial Warrants”). The terms of the warrants are set forth in a Warrant Agreement (the “April 2022 Warrant Agreement”) entered into on April 1, 2022, between the Company and Continental Stock Transfer & Trust Company as warrant agent.
In connection with the entry into the Amendment No. One to Loan Agreement, and as a required term and condition thereof, on May 26, 2022, the Company granted warrants (the “Additional Warrants” and together with the Initial Warrants, the “Warrants”) to purchase 250 thousand shares of the Company’s common stock to the Additional Lenders and their affiliates. The terms of the Additional Warrants are set forth in a Warrant Agreement (the “May 2022 Warrant Agreement” and together with the April 2022 Warrant Agreement, the “Warrant Agreements”) entered into on May 26, 2022, between the Company and Continental Stock Transfer & Trust Company as warrant agent.
Each holder shall have a put right to require the Company to repurchase any portion of the warrants held by such holder concurrently with the consummation of such fundamental transaction. The fundamental transaction clause requires the warrants to be classified as liabilities.
The initial 2.75 million Initial Warrants were valued at April 1, 2022, the 250 thousand additional Warrants were valued at May 26, 2022 and the total 3 million warrants were revalued at June 30, 2022 using the Dynamic Black Scholes model that computes the impact of a possible change in control transaction upon the exercise of the warrant shares at approximately $23 million, $3 million and $27 million, respectively. The Dynamic Black Scholes Merton inputs used were: expected dividend rate of 0%, expected volatility of 97%-111%, risk free interest rate of 2.61% - 3.01% and expected term of 5.5 years.
The following is an analysis of changes in the derivative liability for the six months ended June 30, 2022 (in thousands):
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| Level Three Roll-Forward | | | |
| | 2022 | |
| Balance at beginning of period | | $ | — | | |
| April 1 warrants issued | | 22,796 | | |
| May 26 warrants issued | | 2,874 | | |
| Value of warrants exercised | | — | | |
| Change in valuation of warrants | | 945 | | |
| Balance at end of period | | $ | 26,615 | | |
Indenture and Convertible Senior Notes
On November 1, 2021, we issued $155 million aggregate principal amount at maturity of our 6.25% Convertible Senior Notes due 2027 (the “Convertible Senior Notes”) pursuant to an Indenture (the “Indenture”), dated November 1, 2021, between the Company and U.S. Bank National Association, as trustee (the “Trustee”), in a private offering (the “Note Offering”) to persons reasonably believed to be “qualified institutional buyers” and/or to “accredited investors” in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended (the "Securities Act"), pursuant to Securities Purchase Agreements. The issue price was 90% of the face amount of each note. Interest payments on the Notes are paid semiannually on April 1 and October 1 of each year, beginning on April 1, 2022. On April 1, 2022, a total of $4 million of interest was paid on our outstanding Convertible Senior Notes.
A total of seventy-five percent (75%) of the net proceeds from the offering were placed into an escrow account to be released to the Company, upon the satisfaction of certain conditions, including the satisfaction or waiver of all of the conditions precedent to the Company’s obligation to consummate the Mobile Acquisition (collectively, the “Escrow Release Conditions”). The Mobile Acquisition (defined below) 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 had 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, such Convertible Senior Notes were not convertible.
Initially, a maximum of 36 million shares of common stock could 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.
On May 26, 2022, May 27, 2022, May 31, 2022, and June 1, 2022, holders of $60 million of the Convertible Senior Notes due 2027, converted such notes into 10.2 million shares of common stock of the Company pursuant to the terms of the Indenture. The shares of common stock issued upon conversion of the $60 million in 6.25% Convertible Senior Notes due 2027 were issued in reliance upon Section 3(a)(9) of the Securities Act, as involving an exchange by the Company exclusively with its security holders. Upon the conversion, the Company recognized $33.9 million unamortized deferred loan cost and discount as interest expense.
The components of the Convertible Senior Notes are presented as follows (in thousands):
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| | June 30, 2022 |
| Principal Amounts | | $ | 155,000 | |
| Conversion of principal into common stock | | (59,822) | |
| Unamortized discount and issuance costs | | (53,635) | |
| Net Carrying Amount | | $ | 41,543 | |
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 (in thousands):
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| Interest payable | | Year 1 | | Year 2 | | Year 3 | | Year 4 | | Year 5 | | Thereafter |
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| Interest payable | | $ | 6,572 | | | $ | 5,949 | | | $ | 5,949 | | | $ | 5,949 | | | $ | 5,949 | | | $ | 2,974 | |
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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 June 30, 2022 and 2021 excludes: 1) options to purchase 0.8 million and 5.6 million shares, respectively, of common stock, 2) warrants to purchase 1.3 million and 1.9 million shares, respectively, of common stock, 3) Series A Preferred Stock which is convertible into 0 and 0.4 million shares of common stock, and 6) 22.2 million shares of common stock which 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 the Convertible Senior Notes.
Due to their anti-dilutive effect, the calculation of diluted earnings per share for the six months ended June 30, 2022 and 2021 excludes: 1) options to purchase 0.9 million and 5.6 million shares, respectively, of common stock, 2) warrants to purchase 1.6 million and 1.9 million shares, respectively, of common stock, 3) Series A Preferred Stock which is convertible into 0 and 0.4 million shares of common stock, and 6) 22.2 million shares of common stock which 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 the Convertible Senior Notes.
The following is a reconciliation of the numerator and denominator for basic and diluted earnings per share for the three months and six months ended June 30, 2022 and 2021 (in thousands, except per share amounts):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| Basic and diluted loss per Share | | | | | | | | |
| Numerator: | | | | | | | | |
| Net loss attributable to shareholders from continuing operations | | $ | (81,797) | | | $ | (20,472) | | | $ | (96,759) | | | $ | (23,847) | |
| Net income attributable to shareholders from discontinued operations, net of tax | | 14,821 | | | 426 | | | 24,814 | | | 4,436 | |
| Net loss attributable to common shareholders | | $ | (66,976) | | | $ | (20,046) | | | $ | (71,945) | | | $ | (19,411) | |
| Denominator: | | | | | | | | |
| Weighted-average common shares outstanding | | 67,923 | | | 52,683 | | | 65,660 | | | 50,210 | |
| Continuing operations | | $ | (1.20) | | | $ | (0.39) | | | $ | (1.47) | | | $ | (0.48) | |
| Discontinued operations, net of tax | | 0.22 | | | 0.01 | | | 0.38 | | | 0.09 | |
| Basic and diluted loss per share | | $ | (0.98) | | | $ | (0.38) | | | $ | (1.09) | | | $ | (0.39) | |
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NOTE 8. COMMON STOCK
During the six months ended June 30, 2022, the Company issued 386 thousand shares of common stock in connection with the conversion of Series A Convertible Preferred Stock, pursuant to the terms of such securities, issued 1.1 million shares of the Company's common stock in exchange for warrants to purchase 1.5 million shares of the Company's common stock with an exercise price of $2.25 per share on a cashless basis, and issued 10.2 million shares of the Company's common stock in conversion of $59.8 million in Convertible Senior Notes. In addition, the Company issued 0.6 million shares of common stock in connection with the exercise of options.
During the six months ended June 30, 2021, the Company issued 13.8 million shares of common stock in connection with the conversion of Series A, Series B & B1 Convertible Preferred Stock and exercises of warrants into common stock of the Company, pursuant to the terms of such securities. In addition, the Company issued 0.5 million 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 1.5 million 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 1.1 million 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.
Conversion of Convertible Senior Notes
On May 26, 2022, May 27, 2022, May 31, 2022, and June 1, 2022, holders of $59.8 million of the Company’s 6.25% Convertible Senior Notes due 2027, converted such notes into 10.2 million shares of common stock of the Company pursuant to the terms of the Indenture.
Conversion of Series A Preferred Stock
Pursuant to the designation of the rights and preferences of the Series A Convertible Preferred Stock of the Company, each share of Series A Convertible Preferred Stock is automatically converted into shares of common stock of the Company (on a one-for-one basis), automatically and without further action by the Company or any holder, upon the first to occur of certain events, including if the closing price of the Company’s common stock on the Nasdaq Capital Market averages at least $15.00 per share over a period of 20 consecutive trading days and the daily trading volume over the same 20-day period averages at least 7,500 shares (the “Automatic Conversion Provision”).
Effective on June 10, 2022, the Automatic Conversion Provision of the Series A Convertible Preferred Stock was triggered, and the 374,337 outstanding shares of the Company’s Series A Convertible Preferred Stock automatically converted into 374,337 shares of common stock of the Company and on June 10, 2022, all rights of any holder with respect to the shares of the Series A Convertible Preferred Stock so converted, including the rights, if any, to receive distributions of the Company’s assets terminated, except only for the rights of such holders to receive certificates for the number of whole shares of common stock into which such shares of the Series A Convertible Preferred Stock were converted.
NOTE 9. PREFERRED STOCK AND DETACHABLE WARRANTS
The total number of authorized shares of the Company’s preferred stock is 50 million shares, $0.001 par value per share. The total number of designated shares of the Company’s Series A Convertible Preferred Stock is 5 million (“Series A Preferred”). The total number of designated shares of the Company’s Series B Convertible Preferred Stock is 10 million. The total number of designated shares of the Company’s Series B1 Convertible Preferred Stock is 17 million. The total number of designated shares of Series C Convertible Preferred Stock is 44,000. As of June 30, 2022 and December 31, 2021, there were 0 and 386 thousand shares, respectively, of Series A Preferred Stock issued and outstanding. As of June 30, 2022 and December 31, 2021, there were no shares of Series B , B1 and C Preferred Stock outstanding.
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 gasoline, diesel and jet fuel produced at our Mobile refinery as well as pygas and industrial fuels, which are produced at a third-party facility.
(3) The Recovery segment consists primarily of revenues generated from the sale of ferrous and non-ferrous recyclable Metal(s) products that are recovered from manufacturing and consumption. It also includes revenues generated from trading/marketing of Group III Base Oils.
We also disaggregate our revenue by product category for each of our segments, as we believe such disaggregation helps depict how our revenue and cash flows are affected by economic factors.
Segment information for the three and six months ended June 30, 2022 and 2021 is as follows (in thousands):
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| THREE MONTHS ENDED JUNE 30, 2022 |
| | Black Oil | | Refining &
Marketing | | Recovery | | Total |
| Revenues: | | | | | | | | |
| Gasolines | | $ | — | | | $ | 255,909 | | | $ | — | | | $ | 255,909 | |
| Jet Fuels | | — | | | 143,688 | | | — | | | 143,688 | |
| Diesel | | — | | | 322,317 | | | — | | | 322,317 | |
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| Pygas | | — | | | 20,685 | | | — | | | 20,685 | |
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| Oil collection services | | 26 | | | — | | | — | | | 26 | |
Metals (1) | | — | | | — | | | 4,318 | | | 4,318 | |
Other refinery products (2) | | 666 | | | 72,460 | | | 877 | | | 74,003 | |
| VGO/Marine fuel sales | | 19,562 | | | 151,331 | | | — | | | 170,893 | |
| Total revenues | | 20,254 | | | 966,390 | | | 5,195 | | | 991,839 | |
| Cost of revenues (exclusive of depreciation and amortization shown separately below) | | 20,147 | | | 959,767 | | | 4,528 | | | 984,442 | |
| Depreciation and amortization attributable to costs of revenues | | 31 | | | 3,009 | | | 82 | | | 3,122 | |
| Gross profit | | 76 | | | 3,614 | | | 585 | | | 4,275 | |
| Selling, general and administrative expenses | | 12,027 | | | 23,597 | | | 1,017 | | | 36,641 | |
| Depreciation and amortization attributable to operating expenses | | 27 | | | 736 | | | — | | | 763 | |
| Loss from operations | | $ | (11,978) | | | $ | (20,719) | | | $ | (432) | | | $ | (33,129) | |
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| THREE MONTHS ENDED JUNE 30, 2021 |
| | Black Oil | | Refining &
Marketing | | Recovery | | Total |
| Revenues: | | | | | | | | |
| Gasolines | | $ | — | | | $ | 6,083 | | | $ | — | | | $ | 6,083 | |
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| Diesel | | — | | | 13,481 | | | — | | | 13,481 | |
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| Pygas | | — | | | 3,862 | | | — | | | 3,862 | |
| Industrial fuel | | — | | | 410 | | | — | | | 410 | |
| Oil collection services | | 155 | | | — | | | — | | | 155 | |
Metals (1) | | — | | | — | | | 6,151 | | | 6,151 | |
Other refinery products (2) | | — | | | — | | | 86 | | | 86 | |
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| Total revenues | | 155 | | | 23,836 | | | 6,237 | | | 30,228 | |
| Cost of revenues (exclusive of depreciation and amortization shown separately below) | | 363 | | | 22,248 | | | 5,430 | | | 28,041 | |
| Depreciation and amortization attributable to costs of revenues | | 19 | | | 31 | | | 66 | | | 116 | |
| Gross profit (loss) | | (227) | | | 1,557 | | | 741 | | | 2,071 | |
| Selling, general and administrative expenses | | 3,281 | | | 687 | | | 209 | | | 4,177 | |
| Depreciation and amortization attributable to operating expenses | | 27 | | | — | | | — | | | 27 | |
| Income (loss) from operations | | $ | (3,535) | | | $ | 870 | | | $ | 532 | | | $ | (2,133) | |
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| SIX MONTHS ENDED JUNE 30, 2022 |
| | Black Oil | | Refining &
Marketing | | Recovery | | Total |
| Revenues: | | | | | | | | |
| Gasoline | | $ | — | | | $ | 263,458 | | | $ | — | | | $ | 263,458 | |
| Jet Fuels | | — | | | 143,688 | | | — | | | 143,688 | |
| Diesel | | — | | | 344,225 | | | — | | | 344,225 | |
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| Pygas | | — | | | 25,375 | | | — | | | 25,375 | |
| Industrial fuel | | — | | | 572 | | | — | | | 572 | |
| Oil collection services | | 240 | | | — | | | — | | | 240 | |
Metals (1) | | — | | | — | | | 7,733 | | | 7,733 | |
Other refinery products (2) | | 666 | | | 72,460 | | | 1,410 | | | 74,536 | |
| VGO/Marine fuel sales | | 20,898 | | | 151,331 | | | — | | | 172,229 | |
| Total revenues | | 21,804 | | | 1,001,109 | | | 9,143 | | | 1,032,056 | |
| Cost of revenues (exclusive of depreciation and amortization shown separately below) | | 21,797 | | | 992,854 | | | 8,357 | | | 1,023,008 | |
| Depreciation and amortization attributable to costs of revenues | | 47 | | | 3,033 | | | 156 | | | 3,236 | |
| Gross profit (loss) | | (40) | | | 5,222 | | | 630 | | | 5,812 | |
| Selling, general and administrative expenses | | 19,438 | | | 24,721 | | | 1,264 | | | 45,423 | |
| Depreciation and amortization attributable to operating expenses | | 54 | | | 736 | | | — | | | 790 | |
| Loss from operations | | $ | (19,532) | | | $ | (20,235) | | | $ | (634) | | | $ | (40,401) | |
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| SIX MONTHS ENDED JUNE 30, 2021 |
| | Black Oil | | Refining &
Marketing | | Recovery | | Total |
| Revenues: | | | | | | | | |
| Gasoline | | $ | — | | | $ | 10,494 | | | $ | — | | | $ | 10,494 | |
| | | | | | | | |
| Diesel | | — | | | 25,060 | | | — | | | 25,060 | |
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| Pygas | | — | | | 6,835 | | | — | | | 6,835 | |
| Industrial fuel | | — | | | 721 | | | — | | | 721 | |
| Oil collection services | | 278 | | | — | | | 3 | | | 281 | |
Metals (1) | | — | | | — | | | 11,796 | | | 11,796 | |
Other refinery products (2) | | — | | | — | | | 86 | | | 86 | |
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| Total revenues | | 278 | | | 43,110 | | | 11,885 | | | 55,273 | |
| Cost of revenues (exclusive of depreciation and amortization shown separately below) | | 643 | | | 40,198 | | | 10,009 | | | 50,850 | |
| Depreciation and amortization attributable to costs of revenues | | 39 | | | 63 | | | 126 | | | 228 | |
| Gross profit (loss) | | (404) | | | 2,849 | | | 1,750 | | | 4,195 | |
| Selling, general and administrative expenses | | 5,223 | | | 1,447 | | | 365 | | | 7,035 | |
| Depreciation and amortization attributable to operating expenses | | 54 | | | — | | | — | | | 54 | |
| Income (loss) from operations | | $ | (5,681) | | | $ | 1,402 | | | $ | 1,385 | | | $ | (2,894) | |
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(1) 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.
(2) 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 June 30, 2022 puts the Company in an accumulated loss position for the cumulative 12 quarters then ended. For tax reporting purposes, we have net operating losses (“NOLs”) of approximately $146 million as of June 30, 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 $65 million from January 1, 2022 through June 30, 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 June 30, 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 June 30, 2022 |
| Contract Type | Contract Period | Weighted Average Strike Price (Barrels) | | | Remaining Volume (Barrels) | Fair Value |
| | | | | (in thousands) | (in thousands) |
| Swap | Aug. 2022- Oct. 2022 | $ | 14.77 | | | | 3,220 | | $ | (47,773) | |
| Options | Aug 2022 - Aug 2022 | $ | 6.98 | | | | 63 | | $ | 1,048 | |
| Futures | Aug 2022 - Aug 2022 | $ | 45.79 | | | | 15 | | $ | (17) | |
| Futures | Sep 2022 - Sep 2022 | $ | 44.42 | | | | 13 | | $ | 41 | |
| Futures | June 2022 - June 2022 | $ | 47.79 | | | | 9 | | $ | 165 | |
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| As of December 31, 2021 |
| Contract Type | Contract Period | Weighted Average Strike Price (Barrels) | | | Remaining Volume (Barrels) | Fair Value |
| | | | | (in thousands) | (in thousands) |
| Options | Dec. 2021-Mar. 2022 | $ | 3.18 | | | | 18 | | $ | 136 | |
| Futures | Dec. 2021-Mar. 2022 | $ | 31.59 | | | | 20 | | $ | 71 | |
| Futures | Dec. 2021-Mar. 2022 | $ | 32.48 | | | | 50 | | $ | (111) | |
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The carrying values of the Company’s derivatives positions and their locations on the consolidated balance sheets as of June 30, 2022 and December 31, 2021 are presented in the table below.
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| Balance Sheet Classification | Contract Type | 2022 | 2021 |
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| Crude oil options | $ | 1,048 | | $ | 136 | |
| Crude oil swaps | (47,773) | | — | |
| Crude oil futures | 189 | | (40) | |
| Derivative commodity assets (liabilities) | | $ | (46,536) | | $ | 96 | |
For the three months ended June 30, 2022 and 2021, we recognized $94.3 million and $1 million of loss, respectively, on commodity derivative contracts on the consolidated statements of operations as part of our cost of revenues.
For the six months ended June 30, 2022 and 2021, we recognized $93.7 million and $1.9 million 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
On April 1, 2022, the Company entered into one finance lease and the balance of finance lease right-of-use lease assets is $44.4 million at June 30, 2022. The associated amortization expenses for the three months ended June 30, 2022 and 2021 were $0.8 million and $1.1 thousand, respectively, and are included in depreciation and amortization on the unaudited consolidated statements of operations. The associated interest expense for the three months ended June 30, 2022 and 2021 were $0.8 million and $14 thousand, respectively, and are included in interest expense on the unaudited consolidated statements of operations. The associated amortization expenses for the six months ended June 30, 2022 and 2021 were $0.8 million and $2.2 thousand, respectively, and are included in depreciation and amortization on the unaudited consolidated statements of operations. The associated interest expense for the six months ended June 30, 2022 and 2021 were $1.4 million and $23 thousand, 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 and six months ended June 30, 2022 and 2021. Total operating lease costs for both the three months ended June 30, 2022 and 2021 were $0.25 million and $0.2 million, respectively. Total operating lease costs for both the six months ended June 30, 2022 and 2021 were $0.5 million and $0.4 million, respectively.
Cash Flows
Cash paid for amounts included in operating lease liabilities was $0.5 million and $0.4 million during the six months ended June 30, 2022 and 2021, and is included in operating cash flows. Cash paid for amounts included in finance lease was $107 thousand and $134 thousand during the six months ended June 30, 2022 and 2021, respectively, and is included in financing cash flows.
Maturities of our lease liabilities for all operating leases are as follows as of June 30, 2022 (in thousands):
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| June 30, 2022 |
| Facilities | | Equipment | | Plant | | | | Total |
| Year 1 | $ | 244 | | | $ | 8 | | | $ | 702 | | | | | $ | 954 | |
| Year 2 | 105 | | | 7 | | | 701 | | | | | 813 | |
| Year 3 | 47 | | | 6 | | | 701 | | | | | 754 | |
| Year 4 | 11 | | | — | | | 701 | | | | | 712 | |
| Year 5 | — | | | — | | | 701 | | | | | 701 | |
| Thereafter | — | | | — | | | 3,331 | | | | | 3,331 | |
| Total lease payments | 407 | | | 21 | | | 6,837 | | | | | 7,265 | |
| Less: interest | (33) | | | (1) | | | (2,462) | | | | | (2,496) | |
| Present value of operating lease liabilities | $ | 374 | | | $ | 20 | | | $ | 4,375 | | | | | $ | 4,769 | |
The weighted average remaining lease terms and discount rates for all of our operating leases were as follows as of June 30, 2022:
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| Remaining lease term and discount rate: | | June 30, 2022 |
| Weighted average remaining lease terms (years) | | |
| Lease facilities | | 1.62 |
| Lease equipment | | 2.84 |
| Lease plant | | 9.37 |
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| Weighted average discount rate | | |
| Lease facilities | | 9.16 | % |
| Lease equipment | | 8.00 | % |
| Lease plant | | 9.37 | % |
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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, SUBSCRIPTION AGREEMENTS AND MOBILE REFINERY ACQUISITION
Completion of Myrtle Grove Purchase Agreement
On April 1, 2022, the Company, through Vertex Splitter Corporation (“Vertex Splitter”), a wholly-owned subsidiary of the Company acquired the 15% noncontrolling interest of Vertex Refining Myrtle Grove LLC (“MG SPV”) held by Tensile-Myrtle Grove Acquisition Corporation (“Tensile-MG”), an affiliate of Tensile Capital Partners Master Fund LP, an investment fund based in San Francisco, California (“Tensile”) from Tensile-Vertex for $7.2 million, which was based on the 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.
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 thousand to the noncontrolling interest. Second, the Company applied the subsequent measurement guidance in ASC 480-10-S99-3A, which indicates that the noncontrolling interest’s carrying amount is the higher of (1) the cumulative amount that would result from applying the measurement guidance in ASC 810-10 in the first step or (2) the redemption value. Pursuant to ASC 480-10-S99-3A, for a security that is probable of becoming redeemable in the future, the Company adjusted the carrying amount of the redeemable noncontrolling interests to what would
be the redemption value assuming the security was redeemable at the balance sheet date. This accretion adjustment of $0.4 million increased the carrying amount of redeemable noncontrolling interests to the redemption value as of April 1, 2022 of $7.2 million. Adjustments to the carrying amount of redeemable noncontrolling interests to redemption value are reflected in retained earnings.
The table below presents the reconciliation of changes in redeemable noncontrolling interest relating to MG SPV as of June 30, 2022 and 2021 (in thousands):
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| June 30, 2022 | June 30, 2021 | |
| Beginning balance | $ | 6,812 | | $ | 5,473 | | |
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| Net loss attributable to redeemable non-controlling interest | (38) | | (129) | | |
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| Accretion of non-controlling interest to redemption value | 428 | | 762 | | |
| Redemption of non-controlling interest | (7,202) | | | |
| Ending balance | $ | — | | $ | 6,106 | | |
Completion of Heartland Purchase Agreement
On May 26, 2022, the Company, through Vertex Splitter acquired the 65% noncontrolling interest of Heartland SPV held by Tensile-Heartland from Tensile-Vertex Holdings LLC (“Tensile-Vertex”), an affiliate of Tensile for $43.5 million, which was based on the value of the Class B Unit preference of Heartland SPV held by Tensile-Heartland, plus capital invested by Tensile-Heartland in Heartland SPV (which had not been returned as of the date of payment), plus cash and cash equivalents held by Tensile-Heartland as of the closing date. As a result, the Company acquired 100% of Heartland SPV, which in turn owns the Company’s Columbus, Ohio, re-refining complex.
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 $6.8 million to the noncontrolling interest. Second, the Company applied the subsequent measurement guidance in ASC 480-10-S99-3A, which indicates that the noncontrolling interest’s carrying amount is the higher of (1) the cumulative amount that would result from applying the measurement guidance in ASC 810-10 in the first step or (2) the redemption value. At May 26, 2022, the cumulative amount resulting from the application of the measurement guidance in ASC 810-10 was $43.5 million. On May 26, 2022, the Company acquired a 65% interest in Heartland SPV from Tensile for $43.5 million.
The table below presents the reconciliation of changes in redeemable noncontrolling interest relating to Heartland SPV as of June 30, 2022 and 2021 (in thousands):
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| June 30, 2022 | June 30, 2021 |
| Beginning balance | $ | 36,635 | | $ | 26,139 | |
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| Net income attributable to redeemable non-controlling interest | 6,829 | | 4,783 | |
| Redemption of non-controlling interest | (43,464) | | — | |
| Ending balance | $ | — | | $ | 30,922 | |
The amount of accretion of redeemable noncontrolling interest to redemption value of $0.4 million and $0.8 million are presented as an adjustment to net income (loss) attributable to Vertex Energy, Inc., to arrive at net income (loss) attributable to common shareholders on the consolidated statements of operations which represent the MG SPV and Heartland SPV accretion of redeemable noncontrolling interest to redemption value combined for the six months ended June 30, 2022 and 2021, respectively.
Mobile Refinery Acquisition
On April 1, 2022, Vertex Operating assigned its rights to the May 26, 2021 Sale and Purchase Agreement between Vertex Operating and Equilon Enterprises LLC d/b/a Shell Oil Products US, Shell Oil Company and Shell Chemical LP, subsidiaries of Shell plc (“Shell”) (the “Refinery Purchase Agreement”), to Vertex Refining and on the same date, Vertex Refining completed the acquisition of a Mobile, Alabama refinery (the “Mobile Refinery”) from Shell (the “Mobile Acquisition”). On the Effective Date, a total of $75 million (less $10 million previously paid) was paid by Vertex Refining in consideration for 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 $0.4 million, $15.9 million was paid to Shell for previously agreed upon capital expenditures and miscellaneous prepaid and reimbursable items, and $130 million was paid to Shell by Vertex Refining in connection with the purchase of certain crude oil inventory and finished products owned by Shell and located at the Mobile Refinery on April 1, 2022 (approximately $124 million of which was funded by Macquarie (defined below) as a result of the simultaneous sale of such inventory to Macquarie pursuant to an Inventory Sales Agreement between Vertex Refining and Macquarie). The Company also paid $8.7 million at closing pursuant to the terms of a Swapkit Purchase Agreement entered into with Shell on May 26, 2021 (the “Swapkit Agreement”), pursuant to which the Company agreed to fund a technology solution comprising the ecosystem required for the Company to run the Mobile Refinery after closing (the “Swapkit”).
The purchase price allocation is preliminary and subject to change based upon the finalization of our valuation report. The following table summarizes the preliminary determination and recognition of assets acquired (in thousands):
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| Financing agreement | | Vertex acquisition | | Total |
| Inventory | $ | 124,311 | | | $ | 5,909 | | | $ | 130,220 | |
| Prepaid assets | — | | | 147 | | | 147 | |
| Fixed assets | — | | | 97,158 | | | 97,158 | |
| Total purchase price | $ | 124,311 | | | $ | 103,214 | | | $ | 227,525 | |
The following table presents summarized results of operations of Mobile Refinery for the period from April 1, 2022 to June 30, 2022, and are included in the accompanying consolidated statement of operations for the period ended June 30, 2022 (in thousands):
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| For Three Months Ended June 30, 2022 |
| Revenue | $ | 922,196 | |
| Net loss | $ | (24,271) | |
The following table presents unaudited pro forma results of operations reflecting the acquisition of Mobile Refinery as if the acquisition had occurred as of January 1, 2021. This information has been compiled from current and historical financial statements and is not necessarily indicative of the results that actually would have been achieved had the transaction occurred at the beginning of the periods presented or that may be achieved in the future (in thousands):
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| For Six Months Ended June 30, |
| 2022 | | 2021 |
| Revenue | $ | 1,670,800 | | | $ | 942,900 | |
| Net income (loss) | $ | 30,200 | | | $ | (24,900) | |
NOTE 15. INVENTORY FINANCING AGREEMENT
On April 1, 2022, pursuant to an Inventory Sales Agreement entered into between Vertex Refining and Macquarie, Macquarie purchased all the Mobile Refinery Inventory from Vertex Refining for $130 million (which funds, together with cash on hand, were used by Vertex Refining to purchase the Mobile Refinery Inventory from Shell), which Mobile Refinery Inventory then became subject to the terms of the Supply and Offtake Agreement, discussed in detail below. The following table summarizes our outstanding obligations under our inventory financing agreements as of June 30, 2022 (in thousands):
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| | June 30, 2022 |
| Obligations under inventory financing agreement | | $ | 174,607 | |
| Unamortized financing cost | | (1,750) | |
| Obligations under inventory financing agreement, net | | $ | 172,857 | |
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 takes title to the refined products stored in our storage tanks until they are sold to our retail locations or to third parties. We record the inventory owned by Macquarie on our behalf as inventory with a corresponding accrued liability on our balance sheet because we maintain the risk of loss until the refined products are sold to third parties and we have an obligation to repurchase it.
Pursuant to the Supply and Offtake Agreement and subject to the terms and conditions therein, Macquarie may during the term of the Supply and Offtake Agreement procure crude oil and refined products from certain third parties which may be sold to Vertex Refining or third parties pursuant to the Supply and Offtake Agreement and may sell Refined Products to Vertex Refining or third parties (including customers of Vertex Refining).
The obligations of Vertex Refining and any of its subsidiaries under the Supply and Offtake Agreement and related transaction documents are guaranteed by the Company. The obligations of Vertex Refining and any of its subsidiaries under the Supply and Offtake Agreement and related transaction documents are also secured by a Pledge and Security Agreement in favor of Macquarie, discussed below, executed by Vertex Refining. In addition, the Supply and Offtake Agreement also requires that Vertex Refining post and maintain cash collateral (in the form of an independent amount) as security for Vertex Refining’s obligations under the Supply and Offtake Agreement and the related transaction documents. The amount of cash collateral is subject to adjustments during the term.
Pursuant to the Supply and Offtake Agreement, Vertex Refining and Macquarie agreed to cooperate to develop and document, by no later than 180 days after the Commencement Date (September 28, 2022), procedures relating to the unwinding and termination of the agreement and related agreements, in the event of the expiration or early termination of the Supply and Offtake Agreement. The parties also agreed to use commercially reasonable efforts to negotiate mutually agreeable terms for Macquarie’s intermediating of renewable feedstocks and renewable diesel that will be utilized and/or produced by Vertex Refining in connection with and following a planned renewable diesel conversion project at the Mobile Refinery (including providing Macquarie a right of first refusal in connection therewith), for 90 days after the Commencement Date (the “RD Period”), which discussions are ongoing. If, by the end of the RD Period, Macquarie and Vertex Refining, each acting in good faith and in a commercially reasonable manner, have not been able to reach commercial agreement regarding the entry into a renewable diesel intermediation, Vertex Refining may elect to terminate the Supply and Offtake Agreement by providing notice of any such election to Macquarie; provided that no such election may be effective earlier than the date falling 90 calendar days following the date on which such notice is delivered. The agreement is also subject to termination upon the occurrence of certain events, including the termination of certain agreements relating to the delivery of crude oil to and the offtake of products from the Mobile Refinery. Upon an early termination of the Supply and Offtake Agreement, Vertex Refining is required to pay amounts relating to such termination to Macquarie including, among other things, outstanding unpaid amounts, amounts owing with respect to terminating transactions under the Supply and Offtake Agreement and related transaction documents, unpaid ancillary costs, and breakage costs, losses and out-of-pocket costs with respect to the termination, liquidation, maintenance or
reestablishment, or redeployment of certain hedges put in place by Macquarie in connection with the transactions contemplated by the agreement, and Vertex Refining is required to pay other termination fees and amounts to Macquarie in the event of any termination of the agreement. Additionally, upon the termination of the Supply and Offtake Agreement, the outstanding obligations of Vertex Refining and Macquarie to each other will be calculated and reduced to an estimated net settlement payment which will be subject to true-up when the final settlement payment has been calculated following termination.
The Supply and Offtake Agreement requires Vertex Refining to prepare and deliver certain forecasts, projections and estimates and comply with financial statement delivery obligations and other disclosure obligations. The agreement also requires Vertex Refining to provide Macquarie notice of certain estimated monthly crude oil delivery, crude oil consumption, product production, target inventory levels and product offtake terms, which Macquarie has the right to reject, subject to certain disclosure requirements.
The Supply and Offtake Agreement has a 24 month term following the Commencement Date, subject to the performance of customary covenants, and certain events of default and termination events provided therein (certain of which are discussed in greater detail below), for a facility of this size and type. Additionally, either party may terminate the agreement at any time, for any reason, with no less than 180 days prior notice to the other.
The Supply and Offtake Agreement includes certain customary representations, warranties, indemnification obligations and limitations of liability of the parties for a facility of this size and type, and also requires Vertex Refining to be responsible for certain ancillary costs relating to the Supply and Offtake Agreement and the transactions contemplated thereby. The Supply and Offtake Agreement requires Vertex Refining to comply with various indemnity, insurance and tax obligations, and also includes a prohibition on any amendments to Vertex Refining’s financing agreements which, among other things, adversely affect Macquarie’s rights and remedies under the Supply and Offtake Agreement and related transaction documents without the prior consent of Macquarie; a prohibition on Vertex Refining entering into any financing agreement which would cause Vertex Refining’s specified indebtedness to exceed $10 million without Macquarie’s prior consent, subject to certain exceptions; and a requirement that Vertex Refining not have less than $17.5 million in unrestricted cash for any period of more than three consecutive business days. The Supply and Offtake Agreement includes events of default and termination events, including if the Company ceases to beneficially own, directly or indirectly, 100% of the capital stock of Vertex Refining; the change in ownership of the Company or Vertex Refining resulting in one person or group acquiring 50% or more of the capital stock of the Company or Vertex Refining (as applicable); or a change in a majority of the Board of Directors of the Company or Vertex Refining during any 12 consecutive months, without certain approvals, including the approval of the Board of Directors of the Company or Vertex Refining (as applicable) immediately prior to such change; and a cross default to indebtedness (other than indebtedness under financing agreements) of the Company or Vertex Refining for over $20 million, a cross default to indebtedness under financing agreements of Vertex Refining or the Company, or a final judgment or order being rendered against Vertex Refining or the Company in an amount exceeding $20 million.
The price for crude oil purchased by the Company from Macquarie and for products sold by the Company to Macquarie within each agreed product group, in each case, is equal to a pre-determined benchmark, plus a pre-agreed upon differential, subject to adjustments and monthly true-ups.
Vertex Refining 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”).
NOTE 16. 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.
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 June 30, 2022, and 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Revenues | $ | 59,429 | | | $ | 35,068 | | | $ | 112,459 | | | $ | 68,216 | |
| Cost of revenues (exclusive of depreciation shown separately below) | 33,585 | | | 24,965 | | | 65,977 | | | 45,611 | |
| Depreciation and amortization attributable to costs of revenues | 1,332 | | | 1,278 | | | 2,636 | | | 2,513 | |
| Gross profit | 24,512 | | | 8,825 | | | 43,846 | | | 20,092 | |
| Operating expenses: | | | | | | | |
| Selling, general and administrative expenses (exclusive of acquisition related expenses) | 6,243 | | | 4,648 | | | 11,327 | | | 9,716 | |
| Depreciation and amortization expense attributable to operating expenses | 427 | | | 456 | | | 872 | | | 912 | |
| Total operating expenses | 6,670 | | | 5,104 | | | 12,199 | | | 10,628 | |
| Income from operations | 17,842 | | | 3,721 | | | 31,647 | | | 9,464 | |
| Other income (expense) | | | | | | | |
| | | | | | | |
| | | | | | | |
| Interest expense | 2 | | | (120) | | | (4) | | | (245) | |
| Total other expense | 2 | | | (120) | | | (4) | | | (245) | |
| Income before income tax | 17,844 | | | 3,601 | | | 31,643 | | | 9,219 | |
| Income tax benefit (expense) | — | | | — | | | — | | | — | |
| Income from discontinued operations, net of tax | $ | 17,844 | | | $ | 3,601 | | | $ | 31,643 | | | $ | 9,219 | |
The assets and liabilities held for sale on the Consolidated Balance Sheets as of June 30, 2022 and December 31, 2021 are as follows (in thousands):
| | | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 | |
| ASSETS | | | | |
| Accounts receivable, net | $ | 15,135 | | | $ | 9,583 | | |
| Inventory | 9,014 | | | 5,548 | | |
| Prepaid expenses | 1,953 | | | 450 | | |
| Total current assets | 26,102 | | | 15,581 | | |
| | | | |
| Fixed assets, at cost | 66,065 | | | 63,837 | | |
| Less accumulated depreciation | (34,388) | | | (32,045) | | |
| Fixed assets, net | 31,677 | | | 31,792 | | |
| Finance lease right-of-use assets | — | | | 813 | | |
| Operating lease right-of use assets | 27,995 | | | 28,260 | | |
| Intangible assets, net | 6,236 | | | 7,107 | | |
| Other assets | 484 | | | 563 | | |
| Assets held for sale | 92,494 | | | 84,116 | | |
| | | | |
| LIABILITIES AND EQUITY | | | | |
| Current liabilities | | | | |
| Accounts payable | 6,156 | | | 7,764 | | |
| Accrued expenses | 1,355 | | | 1,324 | | |
| | | | |
| Finance lease liability-current | — | | | 296 | | |
| Operating lease liability-current | 27,996 | | | 28,261 | | |
| | | | |
| | | | |
| Liabilities held for sale, current | $ | 35,507 | | | $ | 37,645 | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
NOTE 17. FIXED ASSETS, NET
Fixed assets consist of the following (in thousands):
| | | | | | | | | | | | | | | | | |
| Useful Life
(in years) | | June 30, 2022 | | December 31, 2021 |
| Equipment | 10 | | $ | 75,176 | | | $ | 2,060 | |
| Furniture and fixtures | 7 | | 43 | | | 40 | |
| Leasehold improvements | 15 | | 338 | | | 113 | |
| Office equipment | 5 | | 1,167 | | | 918 | |
| Vehicles | 5 | | 575 | | | 373 | |
| Building | 20 | | 2,034 | | | — | |
| Land improvements | 20 | | 273 | | | |
| Construction in progress | | | 30,101 | | | 10,307 | |
| Land | | | 7,015 | | | — | |
| Total fixed assets | | | 116,722 | | | 13,811 | |
| Less accumulated depreciation | | | (4,475) | | | (2,045) | |
| Net fixed assets | | | $ | 112,247 | | | $ | 11,766 | |
The increase in fixed assets is due to the fixed assets acquired by the acquisition of the Mobile Refinery on April 1, 2022. Depreciation expense was $2.4 million and $0.1 million for the three months ended June 30, 2022 and 2021, respectively, for the continued operations. Depreciation expense was $2.5 million and $0.2 million for the six months ended June 30, 2022 and 2021, respectively for the continued operations.
Asset Retirement Obligations:
The Company has asset retirement obligations with respect to certain of its refinery assets due to various legal obligations to clean and/or dispose of various component parts of each refinery at the time they are retired. However, these component parts can be used for extended and indeterminate periods of time as long as they are properly maintained and/or upgraded. It is the Company’s practice and current intent to maintain its refinery assets and continue making improvements to those assets based on technological advances. As a result, the Company believes that its refinery assets have indeterminate lives for purposes of estimating asset retirement obligations because dates, or ranges of dates, upon which the Company would retire refinery assets cannot reasonably be estimated. When a date or range of dates can reasonably be estimated for the retirement of any component part of a refinery, the Company estimates the cost of performing the retirement activities and records a liability for the fair value of that cost using established present value techniques.
NOTE 18. INTANGIBLE ASSETS, NET
Components of intangible assets (subject to amortization) consist of the following items:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | June 30, 2022 | | December 31, 2021 |
| | Useful Life
(in years) | | Gross
Carrying
Amount | | Accumulated Amortization | | Net
Carrying
Amount | | Gross
Carrying
Amount | |
Accumulated Amortization | | Net
Carrying
Amount |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Software | | 3 | | $ | 9,344 | | | $ | 969 | | | $ | 8,375 | | | $ | 538 | | | $ | 179 | | | $ | 359 | |
| | | | | | | | | | | | | | |
Intangible assets are amortized on a straight-line basis. We continually evaluate the amortization period and carrying basis of intangible assets to determine whether subsequent events and circumstances warrant a revised estimated useful life or reduction in value.
Total amortization expense of intangibles was $763 thousand and $27 thousand for the three months ended June 30, 2022 and 2021, respectively. Total amortization expense of intangibles was $790 thousand and $54 thousand for the six months ended June 30, 2022 and 2021, respectively.
Estimated future amortization expense is as follows (in thousands):
| | | | | |
| Year 1 | $ | 3,051 | |
| Year 2 | 3,051 | |
| Year 3 | 2,273 | |
| |
| |
| Thereafter | — | |
| | $ | 8,375 | |
NOTE 19. ACCRUED LIABILITIES
Accrued expenses and other current liabilities consisted of the following (in thousands):
| | | | | | | | | | | | | | |
| | June 30, 2022 | | December 31, 2021 |
| Accrued purchases | | $ | 6,440 | | | $ | 553 | |
| Accrued interest | | 2,111 | | | 1,594 | |
| Accrued compensation and benefits | | 241 | | | 1,082 | |
| Accrued income, real estate, sales and other taxes | | 1,328 | | | 389 | |
| RINS liabilities | | 20,389 | | | — | |
| Environmental liabilities - current | | 51 | | | — | |
| | $ | 30,560 | | | $ | 3,618 | |
The increase in accrued liabilities from December 31, 2021 is due to the operation of the Mobile Refinery, which was acquired on April 1, 2022.
NOTE 20. SUBSEQUENT EVENTS
Warrant Exercises
On July 11, 2022, two holders of warrants to purchase an aggregate of 165,000 shares of our common stock with an exercise price of $4.50 per share and a holder of warrants to purchase 15,000 shares of our common stock with an exercise price of $9.25 per share, exercised such warrants in a cashless exercise (surrendering 81,925 shares of common stock in connection with such exercise, valued based on the five day trailing volume weighted average price of the Company’s common stock, to pay the exercise price due in connection therewith), pursuant to the terms of such warrants, and were issued 98,075 shares of common stock.
On July 19, 2022, a holder of warrants to purchase 100 shares of our common stock with an exercise price of $4.50 per share exercised such warrants for cash and was issued 100 shares of common stock.
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”). The majority of the numbers presented below are rounded numbers and should be considered as approximate.
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:
“BBL” (also “bbl” or “Bbl”) is the abbreviated form for one barrel, 42 U.S. gallons of liquid volume.
“BPD” (also “bpd”) is the abbreviated form for barrels per day. This can refer to designed or actual capacity/throughput.
“BCD” (also “bcd”, “b/cd”) is the abbreviated form of barrels per calendar day; meaning the total number of barrels of actual throughput processed within 24 hours under typical operating conditions.
“Base oil” is a lubricant grade oil initially produced from refining crude oil or through chemical synthesis used in manufacturing lubricant products such as lubricating greases, motor oil, and metal processing fluids.
“Black Oil” is a term used to describe used lubricating oils, which may be visually characterized as dark in color due to carbon and other residual elements and compounds which accumulate through use. This term can also refer to the business segment within the Company, which manages used motor oil related operations and processes such as purchase, sales, aggregation, processing, and re-refining.
“Catalytic Reforming” is a process that uses heat, pressure, and a catalyst to convert low-octane naphthas into high-octane gasoline blending components.
“Cracking” refers to the process of breaking down larger, heavier, and more complex hydrocarbon molecules into simpler and lighter molecules through the use of heat, pressure, and sometimes a catalyst.
“Crude oil distillation” means the process of distilling vapor from liquid crudes, usually by heating and condensing the vapor slightly above atmospheric pressure turning it back to liquid in order to purify, fractionate or form the desired products.
“Cutterstock” also known as “cutter stock”, refers to any stream that is blended to adjust various properties of the resulting blend.
“Generator” means any person, by site, whose act or process produces used oil or whose act first causes used oil to become subject to regulation. Generators can be service stations, governments or other businesses that produce or receive used oil.
“IMO 2020” refers to the International Maritime Organization’s rule, effective January 1, 2020, which limited sulfur content in fuels used on board ships operating outside designated emission control areas to 0.50% mass by mass.
“LLS” means Louisiana Light Sweet Crude and is a grade of crude oil classified by its low sulfur content.
“LPG” means liquefied petroleum gases.
“Lubricant” or “lube” means a solvent-neutral paraffinic product used in commercial heavy-duty engine oils, passenger car oils, and specialty products for industrial applications such as heat transfer, metalworking, rubber, and other general process oil.
“MBL” means one thousand barrels.
“Re-Refining” refers to the process or industry which uses refining processes and technology with used oil as a feedstock to produce high-quality base stocks and intermediate feedstocks for lubricants, fuels, and other petroleum products.
“Refining adjusted EBITDA” represents net income (loss) from operations minus depreciation and amortization, unrealized gains and losses on hedging activities, gain and loss on intermediation agreement, and unusual or non-recurring charges included in selling, general, and administrative expenses.
“Refining gross margin” is defined as revenues less the cost of fuel intakes and other fuel costs. It excludes operating expenses and depreciation attributable to cost of revenues and other non-operating items included in costs of revenues.
“Refining gross margin per barrel of throughput” is calculated as refining gross margin divided by total throughput barrels for the period presented.
“Reformate” is a gasoline blending stock produced by catalytic reforming.
“Renewable Diesel” means a diesel fuel derived from vegetable oils or animal fats that is produced through various processes, most commonly through hydrotreating, reacting the feedstock with hydrogen under temperatures and pressure in the presence of a catalyst.
“RINs” means renewable identification numbers and refers to serial numbers assigned to credits generated from renewable fuel production under the Environmental Protection Agency’s Renewable Fuel Standard (“RFS”) regulations, which require blending renewable fuels into the nation’s fuel supply. In lieu of blending, refiners may purchase these transferable credits to comply with the regulations.
“Sour Crude Oil” refers to crude oil containing quantities of sulfur greater than 0.4 percent by weight.
“Sweet Crude Oil” refers to crude oil containing quantities of sulfur equal to or less than 0.4 percent by weight.
“UMO” is the abbreviation for used motor oil.
“Vacuum Distillation” is the process of distilling vapor from liquid crudes, usually by heating and condensing the vapor below atmospheric pressure turning it back to a liquid in order to purify, fractionate or form the desired products.
“Vacuum Gas Oil” or “VGO” is a product produced from a vacuum distillation column which is predominately used as an intermediate feedstock to produce transportation fuels and other by-products such as gasoline, diesel and marine fuels.
“VTB” refers to vacuum tower bottoms, the leftover bottom product of distillation, which can be processed in cokers and used for upgrading into gasoline, diesel, and gas oil.
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:
•Strategy and Plan of Operations. Discussion of our current strategy and plan of operations.
•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 six and three months ended June 30, 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.
Strategy and Plan of Operations
The principal elements of our strategy include:
•Completion of Renewable Diesel Conversion Project. We are in the process of completing a renewable diesel conversion project designed to modify the Mobile Refinery's hydrocracking unit to produce renewable diesel fuel on a standalone basis. To date, we have technology, engineering and construction partners and construction of foundations and fabrication of piping has commenced. Initial renewable production volumes are expected to come on-stream by the first quarter 2023. The Company expects the total project cost to be in the range of $90 to $100 million, funded entirely through existing cash on-hand and cash flow from operations.
•Expand Feedstock Supply Volume. We intend to expand our feedstock supply volume by growing our collection and aggregation operations. We plan to increase the volume of feedstock we collect directly by developing new relationships with generators and working to displace incumbent collectors; increasing the number of collection personnel, vehicles, equipment, and geographical areas we serve; and acquiring collectors in new or existing territories. We intend to increase the volume of feedstock we aggregate from third-party collectors by expanding our existing relationships and developing new vendor relationships. We believe that our ability to acquire large feedstock volumes will help to cultivate new vendor relationships because collectors often prefer to work with a single, reliable customer rather than manage multiple relationships and the uncertainty of excess inventory.
•Broaden Existing Customer Relationships and Secure New Large Accounts. We intend to broaden our existing customer relationships by increasing sales of used motor oil and re-refined products to these accounts. In some cases, we may also seek to serve as our customers’ primary or exclusive supplier. We also believe that as we increase our supply of feedstock and re-refined products that we will secure larger customer accounts that require a partner who can consistently deliver high volumes.
•Re-Refine Higher Value End Products. We intend to develop, lease, or acquire technologies to re-refine our feedstock supply into higher-value end products. We believe that the expansion of our facilities and our technology, and investments in additional technologies, will enable us to upgrade feedstock into end products, such as lubricating base oil, that command higher market prices than the current re-refined products we produce.
•Pursue Selective Strategic Relationships or Acquisitions. We plan to grow market share by consolidating feedstock supply through partnering with or acquiring collection and aggregation assets. Such acquisitions and/or partnerships could increase our revenue and provide better control over the quality and quantity of feedstock available for resale and/or upgrading as well as providing additional locations. In addition, we intend to pursue further vertical integration opportunities by acquiring complementary processing technologies where we can realize synergies by leveraging our customer and vendor relationships, infrastructure, and personnel, and by eliminating duplicative overhead costs.
Description of Business Activities
Below is a discussion of our business activities during the quarters ended June 30, 2022, and 2021. Effective April 1, 2022, we completed the acquisition of the Mobile Refinery (as discussed and defined below). As a result, since April 1, 2022, our operations 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. This activity falls in the financial results of our Refining and Marketing segment during the three months ended June 30, 2022. The Mobile Refinery has substantially changed our overall revenue, cost of revenue, net income, and earnings before interest, taxes, depreciation, and amortization and during the three months ended June 30, 2022, represented 93% of our total revenue.
The below description is of our business activities during the periods reported (the six months ended June 30, 2022, and 2021).
Vertex is an energy transition company specializing in refining and marketing high-value conventional and lower-carbon alternative transportation fuels. We are engaged in operations across the petroleum value chain, including collection, aggregation, transportation, storage, refinement, and sales of aggregated feedstock and refined products to end-users. We operate in three segments:
(1) Black Oil,
(2) Refining and Marketing, and
(3) Recovery.
We currently provide our services in 15 states, primarily in the Gulf Coast, Midwest, and Mid-Atlantic regions of the United States. For the rolling twelve-month period ending June 30, 2022, we aggregated approximately 87.4 million gallons of used motor oil and other petroleum by-product feedstocks and managed the re-refining of approximately 80.4 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-refine 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 pre-treat used oil feedstock; prior to shipping to our facility in Marrero, Louisiana.
We also operate a facility located in Marrero, Louisiana, which re-refines used motor oil and produces VGO, and a re-refining complex located in Belle Chasse, Louisiana, which we refer to as our Myrtle Grove facility.
Our Refining and Marketing segment manages the refining of crude oil and other petroleum by-products and sells those refined products to end customers.
Our Recovery segment includes a generator solutions company for properly recovering and managing hydrocarbon streams and metals, including 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 16, "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 43 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 and Refining and Marketing segments. In addition, we also utilize third parties for the transportation and storage of used oil feedstocks. In many cases, we have contractual purchase and sale agreements with our suppliers and customers, respectively. We believe these contracts are beneficial to all parties involved because it ensures that a minimum volume is purchased from collectors and generators, a minimum volume is sold to our customers, and we are able to minimize our inventory risk by a spread between the costs to acquire used oil and the revenues received from the sale and delivery of used oil. 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 for the marine fuels market. At our Columbus, Ohio facility (Heartland Petroleum), we produce a base oil product which in turn 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 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 fuel oil cutterstock. We sell our re-refined products directly to end customers or 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.
In addition, the newly acquired Mobile, Alabama facility is included in this segment. 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 vacuum gas oil (VGO), heavy olefin feed, regular gasoline, jet fuel and diesel fuel, vacuum tower bottoms (VTBs), and other incremental products such as LPGs, sulfur, and reformate. We are also currently in the process of completing a renewable diesel conversion project designed to modify the Mobile Refinery's hydrocracking unit to produce renewable diesel fuel on a standalone basis, as discussed above.
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.
Products and Services
We generate the majority of our revenue from refining petroleum products, oil collection services, and sales of the below product categories, and gasolines, jet fuels and diesel. 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, additives, or other compounds are added to manufacture a finished lubricant. The primary substance in lubricants, base oil, can be refined from crude oil or re-refined from used motor oils.
Pygas
Pygas, or pyrolysis gasoline, is a product that can be blended with gasoline as an octane booster or distilled and separated into its components, including benzene and other hydrocarbons.
Industrial Fuel
Industrial fuel is a distillate fuel oil, typically a blend of lower-quality fuel oils. It can include diesel fuels and fuel oils such as No. 1, No. 2, and No. 4 diesel fuels that are historically used for space heating and power generation. Industrial fuel is typically a fuel with 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 kerosene and diesel fuels.
Oil Collection Services
Oil collection services include the collection, handling, treatment, and transacting of used motor oil and related products which contain used motor oil (such as oil filters and absorbents) acquired from 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 refinery products
Other 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
Olefins are 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) |
| Gasolines | | X | |
| Jet Fuels | | X | |
| Diesel | | X | |
| Base oil | X | | X |
| Pygas | | X | |
| Industrial fuel | X | X | |
| | | |
| Oil collection services | X | | |
| Metals | | | X |
| Other refinery products | X | 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 refined finished products which include jet fuel, gasolines, diesels, LPGs, residual fuels which are produced at our Mobile Refinery along with pygas and industrial fuels, which are produced at a third-party facility ("Monument Chemical").
(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
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 Tensile-Vertex, the result of which will be that Vertex Splitter will own 100% of each of Heartland SPV and MG SPV.
On April 1, 2022, the Company, through Vertex Splitter acquired 100% of Tensile-MG from Tensile-Vertex 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.
On May 26, 2022, the Company, through Vertex Splitter acquired 100% of Tensile-Heartland from Tensile-Vertex for $43.5 million, which was equal to $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. As a result of the closing, the Company acquired 100% of Heartland SPV, which in turn owns the Company’s Columbus, Ohio, Heartland facility.
The Heartland Purchase Agreement included 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 the parties bear their own fees and expenses; includes customary indemnification obligations; and includes mutual releases of the parties, which were effective upon closing.
The Company used funds from the Additional Term Loan to pay amounts due under the Heartland Purchase Agreement.
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 Ohio”), and/or the sale of membership interests in Vertex Ohio 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. On May 26, 2022, the Heartland Note was forgiven after the completion of the Tensile-Heartland transaction as noted above as an inter-company transaction.
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 “Initial 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 $94.3 million.
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, each a “Loan Party” and collectively, the “Loan Parties”).
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 2.75 million 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 thousand, $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”).
As discussed above, we have started a renewable diesel conversion project designed to modify the Mobile Refinery's hydrocracking unit to produce renewable diesel fuel on a standalone basis, which has an estimated cost of $90 to $100 and is expected to be online during the first quarter of 2023.
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”), which discussions are ongoing. If, by the end of the RD Period, Macquarie and Vertex Refining, each acting in good faith and in a commercially reasonable manner, have not been able to reach commercial agreement regarding the entry into a renewable diesel intermediation, Vertex Refining may elect to terminate the Supply and Offtake Agreement by providing notice of any such election to Macquarie; provided that no such election may be effective earlier than the date falling 90 calendar days following the date on which such notice is delivered. The agreement is also subject to termination upon the occurrence of certain events, including the termination of certain agreements relating to the delivery of crude oil to and the offtake of products from the Mobile Refinery. Upon an early termination of the Supply and Offtake Agreement, Vertex Refining is required to pay certain 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 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 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.
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 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.
Initial 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 “Initial Warrants”) to purchase 2.75 million shares of the Company’s common stock to the Lenders and their assigns. The terms of the Initial 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 “Initial Warrant Agreement”).
The Initial 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 Initial 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 Initial Warrants, such that the aggregate exercise price of all Initial Warrants remains the same before and after any such dilutive event. The Initial Warrants are described in greater detail below under “Amendment Number One to Loan and Security Agreement”.
In connection with the grant of the Initial Warrants, the Company and the holders of such Warrants entered into a Registration Rights Agreement dated April 1, 2022 (the “Initial Registration Rights Agreement”), which was amended and replaced by the Amended and Restated Registration Rights Agreement discussed in greater detail below.
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.
Amendment Number One to Loan and Security Agreement
On May 26, 2022, each of the Initial Guarantors (including the Company), Vertex Refining OH, LLC, an Ohio limited liability company (“Vertex Ohio”), HPRM, and Tensile-Heartland, and together with Vertex Ohio and HPRM, the “Additional Guarantors”, and the Additional Guarantors, together with the Initial Guarantors, the “Guarantors”, and the Guarantors, together with Vertex Refining, the “Loan Parties”), entered into an Amendment Number One to Loan and Security Agreement (“Amendment No. One to Loan Agreement”), with certain of the Lenders and CrowdOut Warehouse LLC, as a lender (the “Additional Lenders” and together with the Initial Lenders, the “Lenders”) and the Agent, pursuant to which, the amount of the Term Loan (as defined below) was increased from $125 million to $165 million, with the Additional Lenders providing an additional term loan in the amount of $40 million (the “Additional Term Loan”, and together with the Initial Term Loan, the “Term Loan”).
As part of the transaction, each of the Additional Guarantors entered into joinders to the prior intercreditor agreement, intercompany subordination agreement, and collateral and pledge agreements relating to the Term Loan, and certain of the prior mortgages securing the Term Loan were amended to provide the Additional Lenders secured rights over the amount of the Additional Term Loan.
The Amendment No. One to Loan Agreement amended the Loan and Security Agreement to provide for the Additional Term Loan; to provide for the grant of the Additional Warrants (defined and described below) to the Lenders; and to include certain other mutually negotiated changes to the Loan and Security Agreement, including permitting certain share buybacks.
The proceeds of the Additional Term Loan can be used by the Company to fund (i) the acquisition of Heartland SPV pursuant to the Heartland Purchase Agreement and (ii) certain fees and expenses associated with the closing of the transactions contemplated by the Heartland Purchase Agreement and the Additional Term Loan.
The Term Loan 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 Term Loan. Amounts owed under the Loan and Security Agreement (as amended), if not earlier repaid, are due on April 1, 2025 (or the next business day thereafter). Interest on the Term Loans 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 Loans (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 (as amended), on the last day of March, June, September and December of each year (or if such day is not a business day, the next succeeding business day), beginning on March 31, 2023 and ending on December 31, 2024, Vertex Refining is required to repay $2,062,500 of the principal amount owed under the Loan and
Security Agreement (as amended) (i.e., 1.25% of the principal amount per quarter), subject to reductions in the event of any prepayment of the Loan and Security Agreement (as amended).
In connection with the Additional Term Loan, and as additional consideration to the Additional Lenders for loaning funds to the Company in connection therewith, the Company granted warrants to purchase 250,000 shares of common stock of the Company to the Lenders (and/or their affiliates), as discussed in greater detail below.
Additional Warrant Agreement and Amended and Restated Registration Rights Agreement
In connection with the entry into the Amendment No. One to Loan Agreement, and as a required term and condition thereof, on May 26, 2022, the Company granted warrants (the “Additional Warrants” and together with the Initial Warrants, the “Warrants”) to purchase 250,000 shares of the Company’s common stock to the Lenders and their affiliates. The terms of the Additional Warrants are set forth in a Warrant Agreement (the “Additional Warrant Agreement” and together with the Initial Warrant Agreement, the “Warrant Agreements”) entered into on May 26, 2022, between the Company and Continental Stock Transfer & Trust Company as warrant agent.
In connection with the grant of the Additional Warrants, the Company and the holders of the Warrants entered into an Amended and Restated Registration Rights Agreement dated May 26, 2022, entered into between the Company and the holders of the Warrants (as amended and restated, the “Amended and Restated Registration Rights Agreement” or the “Registration Rights Agreement”). Under the Registration Rights Agreement, the Company agreed to file a registration statement (the “Initial Registration Statement”) with the SEC as soon as reasonably practicable and in no event later than 75 days following April 1, 2022 (i.e., on or before June 15, 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). The Company filed and obtained effectiveness of the required Registration Statement on July 8, 2022.
The Additional Warrants have a five and one-half-year term and a $9.25 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 Additional Warrant Agreement, are deemed to have granted, issued or sold, subject to certain exceptions, in each case, at a price less than the exercise price, which automatically decreases the exercise price of the Additional Warrants upon the occurrence of such event, as described in greater detail in the Additional Warrant Agreement, and increases the number of shares of common stock issuable upon exercise of the Additional Warrants, such that the aggregate exercise price of all Additional 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 April 1, 2022, pursuant to the exercise of Warrants (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 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 Prior Warrants and Additional Warrants (as calculated in the Warrant Agreement), in excess of the Share Cap. Upon the occurrence of a fundamental transaction (as described in the Warrant Agreements), the Warrant Agreements (a) provide 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 Agreements. 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 Agreements) 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.
Amendment No. 1 to the First Amended and Restated Registration Rights Agreement
On June 15, 2022, the Company and the holders of the Warrants (the “Warrant Holders”) entered into an Amendment No. 1 to the First Amended and Restated Registration Rights Agreement (the “Amendment”), which amended the required filing date of the initial registration statement that the Company is required to use commercially reasonable efforts to file
pursuant to the terms of the Registration Rights Agreement, to register the resale of the shares of common stock underlying the Warrants, from no later than June 15, 2022, to on July 1, 2022, or, if the Company was then ineligible to file a registration statement on such date, to require the Company to use commercially reasonable efforts to cause such registration statement to be declared effective under the Securities Act, as promptly as reasonably practicable after the initial filing thereof (including, if then a “well-known seasoned issuer” (as defined in Rule 405 of the Securities Act, a “WKSI”) by filing such registration statement as an automatically effective shelf registration statement). The Amendment also included various representations from the Company regarding its satisfaction of the requirements for being a WKSI.
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 16, "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 Mobile Refinery and Logistics Assets are included in our Refining and Marketing segment and 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.
This segment also gathers hydrocarbon streams in the form of petroleum distillates, transmix and other chemical products that have become off-specification during the transportation or refining process. These feedstock streams are purchased from pipeline operators, refineries, chemical processing facilities and third-party providers, and then processed at a third-party facility under our direction. The end products are typically three distillate petroleum streams (gasoline blendstock, pygas and fuel oil cutterstock), which are sold to major oil companies or to large petroleum trading and blending companies. The end products are delivered by barge and truck to customers. In addition, we are distributing refined motor fuels such as gasoline, blended gasoline products and diesel used as engine fuels, to third party customers who typically resell these products to retailers and end consumers.
RECOVERY -The Recovery segment is a generator solutions company for the proper recovery and management of hydrocarbon streams. We own and operate a fleet of trucks and other vehicles used for shipping and handling equipment and scrap materials.
Our revenues are affected by changes in various commodity prices including crude oil, natural gas, #6 oil and metals.
Cost of Revenues
BLACK OIL -Cost of revenues for our Black Oil segment are comprised primarily of feedstock purchases from a network of providers. Other cost of revenues includes 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 16, "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, Crystal Energy, LLC and Mobile Refinery 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 systems, applications, and products (SAP) and internet technology (IT) related items and intangibles.
Factors Impacting Comparability of Our Financial Results
Our results of operations for the three and six months ended June 30, 2022, were significantly impacted by the acquisition of the Mobile Refinery on April 1, 2022. There are no comparable amounts presented for the same periods in 2021. See summary of the Mobile Refinery operating results under Results of Operations – Mobile Refinery, below.
Non-GAAP Financial Measures
In addition to our results calculated under generally accepted accounting principles in the United States (“GAAP”), in this Report we also present Refining Gross Margin, Refining Gross Margin Per Barrel of Throughput and Refining Adjusted EBITDA, each as discussed in greater detail below. Refining Gross Margin, Refining Gross Margin Per Barrel of Throughput and Refining Adjusted EBITDA are “non-GAAP financial measures” presented as supplemental measures of the Company’s performance. They are not presented in accordance with GAAP. We use Refining Gross Margin, EBITDA and Adjusted EBITDA as supplements to GAAP measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions, to allocate resources and to compare our performance relative to our peers. Additionally, these measures, when used in conjunction with related GAAP financial measures, provide investors with an additional financial analytical framework which management uses, in addition to historical operating results, as the basis for financial, operational and planning decisions and present measurements that third parties have indicated are useful in assessing the Company and its results of operations. Refining Gross Margin, EBITDA and Adjusted EBITDA are presented because we believe they provide additional useful information to investors due to the various noncash items during the period. Refining Gross Margin, EBITDA, and Adjusted EBITDA are also frequently used by analysts, investors and other interested parties to evaluate companies in our industry.
Refining Gross Margin, Refining Gross Margin Per Barrel of Throughput and Refining Adjusted EBITDA are unaudited, and have limitations as analytical tools, and you should not consider them in isolation, or as a substitute for analysis of our operating results as reported under GAAP. Some of these limitations are: Refining Gross Margin, Refining Gross Margin Per Barrel of Throughput and Refining Adjusted EBITDA do not reflect cash expenditures, or future requirements for capital expenditures, or contractual commitments; Refining Gross Margin, Refining Gross Margin Per Barrel of Throughput and Refining Adjusted EBITDA do not reflect changes in, or cash requirements for, working capital needs; Refining Gross Margin, Refining Gross Margin Per Barrel of Throughput and Refining Adjusted EBITDA do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on debt or cash income tax payments; although depreciation and amortization are noncash charges, the assets being depreciated and amortized will often have to be replaced in the future, Refining Gross Margin, Refining Gross Margin Per Barrel of Throughput and Refining Adjusted EBITDA do not reflect any cash requirements for such replacements; Refining Gross Margin, Refining Gross Margin Per Barrel of Throughput and Refining Adjusted EBITDA, represent only a portion of our total operating results; and other companies in this industry may calculate Refining Gross Margin, Refining
Gross Margin Per Barrel of Throughput and Refining Adjusted EBITDA differently than we do, limiting their usefulness as a comparative measure.
You should not consider Refining Gross Margin, Refining Gross Margin Per Barrel of Throughput and Refining Adjusted EBITDA in isolation, or as substitutes for analysis of the Company’s results as reported under GAAP. The Company’s presentation of these measures should not be construed as an inference that future results will be unaffected by unusual or nonrecurring items. We compensate for these limitations by providing a reconciliation of each of these non-GAAP measures to the most comparable GAAP measure below. We encourage investors and others to review our business, results of operations, and financial information in their entirety, not to rely on any single financial measure, and to view these non-GAAP measures in conjunction with the most directly comparable GAAP financial measure.
Refining gross margin.
Refining gross margin is defined as revenues less the cost of fuel intakes and other fuel costs. It excludes operating expenses and depreciation attributable to cost of revenues and other non-operating items included in costs of revenues.
Refining gross margin per barrel of throughput.
Refining gross margin per throughput barrel is calculated as refining gross margin divided by total throughput barrels for the period presented.
Refining Adjusted EBITDA.
Refining Adjusted EBITDA represents net income (loss) from operations minus depreciation and amortization, , unrealized gains and losses on hedging activities, gain and loss on intermediation agreement, and unusual or non-recurring charges included in selling, general, and administrative expenses.
Crack Spread USGC 2-1-1
The crack spread is a measure of the difference between market prices for refined products and crude oil, commonly used by the refining industry. We use crack spreads as a performance benchmark for our refining gross margin and as a comparison with other industry participants. Crack spreads can fluctuate significantly, particularly when prices of refined products do not move in the same direction as the cost of crude oil. To calculate the crack spread we believe more closely relates to the crude intakes and products at the Mobile Refinery, we use two barrels of Louisiana Light Sweet crude oiil, producing one barrel of USGC CBOB gasoline and one barrel of USGC ULSD.
The following table reconciles gross profit to refining gross margin and net loss to refining Adjusted EBITDA for the periods presented (in thousands):
| | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2022 |
| | Total Refining and Marketing | | Mobile Refinery |
| Gross profit | | $ | 3,614 | | | $ | 1,967 | |
| Operating expenses included in cost of revenues | | 17,575 | | | 17,575 | |
Depreciation and amortization attributable to cost
of revenues | | 3,009 | | | 2,986 | |
| Unrealized loss on hedging activities | | 46,901 | | | 46,901 | |
| Loss on inventory intermediation agreement | | 23,180 | | | 23,180 | |
| Refining gross margin | | $ | 94,279 | | | $ | 92,609 | |
| | | | |
| Net loss from operations | | $ | (20,719) | | | $ | (20,729) | |
| Depreciation and amortization | | 3,745 | | | 3,722 | |
| Unrealized loss on hedging activities | | 46,901 | | | 46,901 | |
| Loss on intermediation agreement | | 23,180 | | | 23,180 | |
| Acquisition costs | | 9,078 | | | 9,078 | |
| | | | | | | | | | | | | | |
| Environmental reserve | | 1,428 | | | 1,428 | |
| Refining Adjusted EBITDA | | $ | 63,613 | | | $ | 63,580 | |
Mobile Refinery
Set forth are our results of operations and certain key performance indicators disaggregated to show only the Mobile Refinery to facilitate comparability between periods (in thousands) and certain key performance indicators:
| | | | | | | | |
| | Three Months Ended June 30, 2022 |
| Statement of operations data: | | |
| Revenues | | $ | 922,196 | |
| Cost of revenues | | 917,243 | |
Depreciation and amortization attributable to cost
of revenues | | 2,986 | |
| Gross profit | | 1,967 |
| Operating expenses: | | |
| Operating expenses | | 21,960 |
| Depreciation and amortization | | 736 |
| Total operating expenses | | 22,696 |
| Operating income (loss) | | (20,729) |
| Other income (expense) | | |
| Interest expense | | (3,250) |
| Other income, net | | 18 |
| Net loss | | $ | (23,961) | |
| Adjusted EBITDA | | $ | 63,580 | |
| Key performance indicators: | | |
| Sales volume (MBLs) | | 6,468 | |
| Refining gross margin | | $ | 92,608 | |
| Refining gross margin per bbl of throughput | | 14.11 | |
| USGC 2-1-1 Crack Spread Per Barrel | | 45.06 | |
| Operating expenses per bbl of throughput | | $ | 3.35 | |
| | | | | | | | |
| | Three Months Ended June 30, 2022 |
| Refinery Feedstocks (bpd) | | |
| Crude oil | | 72,133 |
| Total feedstocks | | 72,133 |
| | |
| Refinery Yields (bpd) | | |
| | | | | | | | |
| Gasolines | | 17,997 |
| Distillates | | 30,112 | |
| Other (1) | | 23,646 | |
| Total average barrel yields per day | | 71,755 |
(1) Other includes intermediates and LPGs.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2022 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2021 FROM CONTINUING OPERATIONS
Set forth below are our results of operations for the three months ended June 30, 2022 as compared to the same period in 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | $ Change - Favorable (Unfavorable) | | % Change - Favorable (Unfavorable) |
| 2022 | | 2021 |
| Revenues | $ | 991,839 | | | $ | 30,228 | | | $ | 961,611 | | | 3,181 | % |
| Cost of revenues (exclusive of depreciation and amortization shown separately below) | 984,442 | | | 28,041 | | | (956,401) | | | (3,411) | % |
| Depreciation and amortization attributable to costs of revenues | 3,122 | | | 116 | | | (3,006) | | | (2,591) | % |
| Gross profit | 4,275 | | | 2,071 | | | 2,204 | | | 106 | % |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Operating expenses: | | | | | | | |
| Selling, general and administrative expenses | 36,641 | | | 4,177 | | | (32,464) | | | (777) | % |
| Depreciation and amortization attributable to operating expenses | 763 | | | 27 | | | (736) | | | (2,726) | % |
| | | | | | | |
| Total operating expenses | 37,404 | | | 4,204 | | | (33,200) | | | (790) | % |
| | | | | | | |
| | | | | | | |
| Loss from operations | (33,129) | | | (2,133) | | | (30,996) | | | (1,453) | % |
| | | | | | | |
| Other income (expense): | | | | | | | |
| | | | | | | |
| | | | | | | |
| Interest income | 18 | | | — | | | 18 | | | 100 | % |
| Other income | 152 | | | 4,222 | | | (4,070) | | | (96) | % |
| Gain on asset sales | — | | | — | | | — | | | — | % |
| Loss on change in value of derivative warrant liability | (945) | | | (21,508) | | | 20,563 | | | 96 | % |
| | | | | | | |
| Interest expense | (47,722) | | | (139) | | | (47,583) | | | (34,232) | % |
| Total other expense | (48,497) | | | (17,425) | | | (31,072) | | | (178) | % |
| | | | | | | |
| Loss from continuing operation before income tax | (81,626) | | | (19,558) | | | (62,068) | | | (317) | % |
| | | | | | | |
| Income tax benefit (expense) | — | | | — | | | — | | | — | % |
| | | | | | | |
| Loss from continuing operations | (81,626) | | | (19,558) | | | (62,068) | | | (317) | % |
| Income from discontinued operations, net of tax | 17,844 | | | 3,601 | | | 14,243 | | | 396 | % |
| Net loss | (63,782) | | | (15,957) | | | (47,825) | | | 79 | % |
| Net income attributable to non-controlling interest and redeemable non-controlling interest from continuing operations | 165 | | | 243 | | | (78) | | | (32) | % |
| Net income attributable to non-controlling interest and redeemable non-controlling from discontinued operations | 3,023 | | | 3,175 | | | (152) | | | (5) | % |
| Net loss attributable to Vertex Energy, Inc. | $ | (66,970) | | | $ | (19,375) | | | $ | (47,595) | | | 116 | % |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Our operating results are significantly affected by the Mobile Refinery acquisition, which closed on April 1, 2022. During the three months ended June 30, 2022, the Mobile Refinery generated approximately $922 million of revenue, cost of revenues associated with the Mobile Refinery were $917 million, there was $4 million of depreciation and amortization to both cost of revenue and operating expenses, and $22 million of selling, general and administrative expenses.
Our revenues and cost of revenues are also 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 June 30, 2022, compared to the same period in 2021, we saw a 16% decrease in the volume of products we manage through our facilities (mainly as a result of the Mobile Refinery acquisition and
increased volumes processed through such facility) In addition, we saw an increase in operating costs (inclusive of depreciation and amortization) on a per barrel basis for the second quarter of 2022 as compared to the same period in 2021.
Total revenues increased approximately $961.6 million, of which $922.2 million was from the Mobile Refinery and $39.4 million of the increase from other business for the three months ended June 30, 2022, compared to the same period in 2021. The $39.4 million increase was due primarily to higher commodity prices and increased volumes at our facilities. Volumes improved as a result of additional feedstock availability in the overall marketplace.
During the three months ended June 30, 2022, total cost of revenues (exclusive of depreciation and amortization) increased approximately $956 million, of which $917 million was from the Mobile Refinery and $39 million was from other business compared to same period ended June 30, 2021. The main reason for the $39 million increase was the result of the increase in commodity prices which impacted our feedstock pricing and certain operational expenses. Our cost of revenues is a function of the ultimate price we are required to pay to acquire feedstocks and other maintenance costs at our facilities.
We had selling, general and administrative expenses of approximately $36.6 million for the three months ended June 30, 2022, compared to $4.2 million from the prior year’s period, an increase of approximately $32.5 million or 777% from the prior year’s period. This increase is primarily due to $22 million of selling, general and administrative expenses relating to the Mobile Refinery and $8 million of Mobile Refinery acquisition costs.
For the three months ended June 30, 2022, total depreciation and amortization expense attributable to cost of revenues was $3.1 million, compared to $0.1 million for the three months ended June 30, 2021, an increase of $3.0 million, mainly due to Mobile Refinery assets acquired and additional investments in rolling stock and facility assets during the fourth quarter of 2021, which increased depreciation and amortization in 2022.
We had gross profit as a percentage of revenue of 0.4% for the three months ended June 30, 2022, compared to gross profit as a percentage of revenues of 6.9% for the three months ended June 30, 2021. The main reason for the decrease was the recognition of a $94 million loss from hedging activities for Mobile Refinery inventory during the period.
Additionally, our per barrel margin decreased 21% for the three months ended June 30, 2022, relative to the three months ended June 30, 2021. Our per barrel margin is calculated by dividing the total volume of product sold (in bbls) by total gross profit for the applicable period ($4.3 million for the 2022 period versus $2.1 million 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 June 30, 2022, compared to the same period during 2021.
Overall, commodity prices were up for the three months ended June 30, 2022, compared to the same period in 2021. For example, the average posting (U.S. Gulfcoast Residual Fuel No. 6 3%) for the three months ended June 30, 2022, increased 61% per barrel from a three-month average of $58.59 for the three months ended June 30, 2021 to $94.11 per barrel for the three months ended June 30, 2022. The average posting (U.S. Gulfcoast Unleaded 87 Waterborne) for the three months ended June 30, 2022 increased $67.79 per barrel from a three-month average of $86.55 for the three months ended June 30, 2021 to $154.35 per barrel for the three months ended June 30, 2022.
We had loss from operations of approximately $33.1 million for the three months ended June 30, 2022, compared to loss from operations of $2.1 million for the three months ended June 30, 2021, an increase of $30.2 million from the prior year’s three-month period. The increase in loss from operations was mostly due to a $21 million loss from the Mobile Refinery and $8 million of acquisition costs related to the transactions contemplated by the Refinery Purchase Agreement and related transactions.
We had interest expense of $47.7 million for the three months ended June 30, 2022, compared to interest expense of $139 thousand for the three months ended June 30, 2021, an increase in interest expense of $47.6 million or 34,232% from the prior period, due to the unamortized deferred loan costs related to the conversion of Convertible Senior Notes to common stock during the period and the interest associated with the Convertible Senior Notes, which were issued on November 1, 2021, and the Term Loan, which was issued on April 1, 2022 ($125 million) and May 26, 2022 ($40 million).
We had an approximately $0.9 million loss on change in value of derivative liability for the three months ended June 30, 2022, in connection with the warrants granted in connection with the Term Loan issued on April 1, 2022 (warrants to purchase 2.75 million shares) and May 26, 2022 (warrants to purchase 0.25 million shares), compared to a loss on change in the value of our derivative liability of $21.5 million 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 approximately $80.9 million for the three months ended June 30, 2022, compared to net loss from continuing operations of $19.6 million for the three months ended June 30, 2021, an increase in net loss from continuing operations of $61.3 million or 317%. The main reason for the increase in net loss for the three months ended June 30, 2022, compared to the three months ended June 30, 2021, was attributable to the loss on inventory hedging activities, acquisition costs and the increase in interest expenses for the three months ended June 30, 2022, each as described in greater detail above.
Each of our segments’ income (loss) from operations during the three months ended June 30, 2022 and 2021 was as follows (in thousands):
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| Three Months Ended
June 30, | | $ Change - Favorable (Unfavorable) | | % Change - Favorable (Unfavorable) |
| Black Oil Segment | 2022 | | 2021 |
| Revenues | $ | 20,254 | | | $ | 155 | | | $ | 20,099 | | | 12,967 | % |
| Cost of revenues (exclusive of depreciation and amortization shown separately below) | 20,147 | | | 363 | | | (19,784) | | | (5,450) | % |
| Depreciation and amortization attributable to costs of revenues | 31 | | | 19 | | | (12) | | | (63) | % |
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| Gross profit (loss) | 76 | | | (227) | | | 39,895 | | | 35 | % |
| Selling general and administrative expense | 12,027 | | | 3,281 | | | (8,746) | | | (267) | % |
| Depreciation and amortization attributable to operating expenses | 27 | | | 27 | | | — | | | — | % |
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| Loss from operations | $ | (11,978) | | | $ | (3,535) | | | $ | 48,641 | | | (239) | % |
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| Refining and Marketing Segment | | | | | | | |
| Revenues | $ | 966,390 | | | $ | 23,836 | | | $ | 942,554 | | | 3,954 | % |
| Cost of revenues (exclusive of depreciation and amortization shown separately below) | 959,767 | | | 22,248 | | | (937,519) | | | (4,214) | % |
| Depreciation and amortization attributable to costs of revenues | 3,009 | | | 31 | | | (2,978) | | | (9,606) | % |
| Gross profit | 3,614 | | | 1,557 | | | 2,057 | | | 132 | % |
| Selling general and administrative expense | 23,597 | | | 687 | | | (22,910) | | | (3,335) | % |
| Depreciation and amortization attributable to operating expenses | 736 | | | — | | | (736) | | | (100) | % |
| Income (loss) from operations | $ | (20,719) | | | $ | 870 | | | $ | 25,703 | | | (2,481) | % |
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| Recovery Segment | | | | | | | |
| Revenues | $ | 5,195 | | | $ | 6,237 | | | $ | (1,042) | | | (17) | % |
| Cost of revenues (exclusive of depreciation and amortization shown separately below) | 4,528 | | | 5,430 | | | 902 | | | 17 | % |
| Depreciation and amortization attributable to costs of revenues | 82 | | | 66 | | | (16) | | | (24) | % |
| Gross profit | 585 | | | 741 | | | (156) | | | (21) | % |
| Selling general and administrative expense | 1,017 | | | 209 | | | (808) | | | (387) | % |
| Depreciation and amortization attributable to operating expenses | — | | | — | | | — | | | — | % |
| Income (loss) from operations | $ | (432) | | | $ | 532 | | | $ | (964) | | | (181) | % |
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Our Black Oil segment generated revenues of approximately $20.3 million for the three months ended June 30, 2022, with cost of revenues (exclusive of depreciation and amortization) of $20.1 million, and depreciation and amortization attributable to cost of revenues of $31 thousand. During the three months ended June 30, 2021, these revenues were $0.2 million with cost of revenues (exclusive of depreciation and amortization) of $0.4 million and depreciation and amortization attributable to cost of revenues of $19 thousand. Revenue from operations increased for the three months ended June 30, 2022, compared to 2021, as a result of increases in commodity prices, and a new Marine Division which provided positive revenue and a profit for the period, which was created at the end of 2021 for blending bunker fuels into the Gulf Coast Market. The total loss was $12 million for the three months
ended June 30, 2022, which increased $8 million compared to the same period ended June 30, 2021, due to the costs related to the acquisition and proposed sale of the UMO Business.
Our Refining segment includes the business operations of our Refining and Marketing operations, which includes Mobile Refinery. Revenues of $966 million in the Refining segment were up 3,954% during the three months ended June 30, 2022, as compared to the same period in 2021 mostly as a result of the operations of the Mobile Refinery, which had $922 million of revenue and the increased commodity prices and volume during the three months ended June 30, 2022. Overall volume for the Refining and Marketing segment was increased during the three months ended June 30, 2022, as compared to the same period in 2021.
Our Recovery segment generated revenues of approximately $5 million for the three months ended June 30, 2022, with cost of revenues (exclusive of depreciation and amortization) of $5 million, and depreciation and amortization attributable to cost of revenues of $82 thousand. During the three months ended June 30, 2021, these revenues were $6 million with cost of revenues (exclusive of depreciation and amortization) of $5 million, and depreciation and amortization attributable to cost of revenues of $66 thousand. Loss from operations of $0.4 million for the three months ended June 30, 2022, compared to profit from operation of $0.5 million 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.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2022 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2021 FROM CONTINUING OPERATIONS
Set forth below are our results of operations for the six months ended June 30, 2022 as compared to the same period in 2021 (in thousands):
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| | | Six Months Ended June 30, | | $ Change - Favorable (Unfavorable) | | % Change - Favorable (Unfavorable) | |
| | 2022 | | 2021 |
| Revenues | | $ | 1,032,056 | | | $ | 55,273 | | | $ | 976,783 | | | 1,767 | % | |
| Cost of revenues (exclusive of depreciation and amortization shown separately below) | | 1,023,008 | | | 50,850 | | | (972,158) | | | (1,912) | % | |
| Depreciation and amortization attributable to costs of revenues | | 3,236 | | | 228 | | | (3,008) | | | (1,319) | % | |
| Gross Profit | | 5,812 | | | 4,195 | | | 1,617 | | | 39 | % | |
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| Operating expenses: | | | | | | | | | |
| Selling, general and administrative expenses | | 45,423 | | | 7,035 | | | (38,388) | | | (546) | % | |
| Depreciation and amortization attributable to operating expenses | | 790 | | | 54 | | | (736) | | | (1,363) | % | |
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| Total operating expenses | | 46,213 | | | 7,089 | | | (39,124) | | | (552) | % | |
| Loss from operations | | (40,401) | | | (2,894) | | | (37,507) | | | (1,296) | % | |
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| Other income (expense): | | | | | | | | | |
| Interest income | | 18 | | | — | | | 18 | | | 100 | % | |
| Other Income | | 625 | | | 4,223 | | | (3,598) | | | (85) | % | |
| Bargain purchase gain related to Omega acquisition | | — | | | — | | | — | | | — | % | |
| Loss on sale of assets | | — | | | — | | | — | | | — | % | |
| Loss on change in value of derivative liability | | (4,524) | | | (23,288) | | | 18,764 | | | 81 | % | |
| Gain (loss) on futures contracts | | — | | | — | | | — | | | — | % | |
| Interest expense | | (51,952) | | | (251) | | | (51,701) | | | (20,598) | % | |
| Total other expense | | (55,833) | | | (19,316) | | | (36,517) | | | — | | |
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| Loss before income taxes | | (96,234) | | | (22,210) | | | (74,024) | | | (333) | % | |
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| Income tax (expense) benefit | | — | | | — | | | — | | | — | % | |
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| Net loss from continuing operations | | (96,234) | | | (22,210) | | | (74,024) | | | (333) | % | |
| Income (loss) from discontinued operations (see Note 15) | | 31,643 | | | 9,219 | | | 25,222 | | | 303 | % | |
| Net income attributable to non-controlling interest and redeemable non-controlling interest from continued operations | | 97 | | | 626 | | | (529) | | | (85) | % | |
| Net income attributable to non-controlling interest and redeemable non-controlling interest from discontinued operations | | 6,829 | | | 4,783 | | | 2,046 | | | 43 | % | |
| Net loss attributable to Vertex Energy, Inc. | | $ | (71,517) | | | $ | (18,400) | | | $ | (27,895) | | | (152) | % | |
Our revenues and cost of revenues are significantly impacted by the recently acquired Mobile Refinery and fluctuations in commodity prices; increases in commodity prices typically result in increases in revenue and cost of revenues (i.e., feedstock acquisition costs). Additionally, we use hedging instruments to manage our exposure to underlying commodity prices. Our gross profit is to a large extent a function of the market discount we are able to obtain in purchasing feedstock, as well as how efficiently management conducts operations. As demand for feedstock increases, the prices we are required to pay for such feedstock typically increases as well.
Our cost of revenues is a function of the ultimate price we are required to pay to acquire feedstocks, how efficient we are in acquiring such feedstocks as well as how efficiently we operate our facilities, and other maintenance at our facilities.
Total revenues increased by 1,767% for the six months ended June 30, 2022 compared to the same period in 2021, due primarily to the Mobile Refinery acquisition, which Mobile Refinery generated approximately $922 million in revenue and higher commodity prices and increased volumes across our facilities, during the six months ended June 30, 2022, compared to the prior year’s period.
During the six months ended June 30, 2022, total cost of revenues (exclusive of depreciation and amortization) was $1 billion, compared to $50.9 million for the six months ended June 30, 2021, an increase of $972.2 million or 1,912% from the prior period. The main reason for the increase was the addition of the Mobile Refinery business which started on April 1, 2022, in addition to higher commodity prices, which impacted our feedstock pricing, and increases in volumes throughout the business.
For the six months ended June 30, 2022, total depreciation and amortization expense attributable to cost of revenues was approximately $3.2 million, compared to $0.2 million for the six months ended June 30, 2021, an increase of $3.0 million, mainly due to assets acquired with the Mobile Refinery purchase.
We had gross profit as a percentage of revenue of 0.6% for the six months ended June 30, 2022, compared to gross profit as a percentage of revenues of 7.6% for the six months ended June 30, 2021. The decrease mainly due to the recognition of $94 million loss of inventory hedging activities, which was reported as cost of revenue, during the period.
We had selling, general, and administrative expenses of approximately $45.4 million for the six months ended June 30, 2022, compared to $7.0 million for the prior year’s period, an increase of $38.4 million or 546%. This increase is primarily due to $22 million of selling, general and administrative expenses relating to the Mobile Refinery and $13.6 million of Mobile Refinery acquisition costs and business development expenses related to the transactions contemplated by the Sale Agreement (which was terminated as of January 25, 2022) and the Refinery Purchase Agreement and related transactions.
We had loss from operations of approximately $40.4 million for the six months ended June 30, 2022, compared to a loss from operations of $2.9 million for the six months ended June 30, 2021, an increase of $37.5 million in loss from the prior year’s six-month period. The increase in loss from operations was mostly due to the cost of the Mobile Refinery acquisition and hedging loss.
We had interest expense of approximately $52.0 million for the six months ended June 30, 2022, compared to interest expense of $0.3 million for the six months ended June 30, 2021, an increase in interest expense of $51.7 million due to a higher amount of term debt outstanding during the six months ended June 30, 2022, compared to the prior period, the unamortized deferred loan costs related to the conversion of Convertible Senior Notes to common stock during the period and the interest associated with the Convertible Senior Notes, which were issued on November 1, 2021, and the Term Loan, which was issued on April 1, 2022 ($125 million) and May 26, 2022 ($40 million).
We had an approximately $4.5 million loss on change in value of derivative liability for the six months ended June 30, 2022, in connection with certain warrants granted in April and May 2022, compared to a loss on change in the value of our derivative liability of $23.3 million in the prior year’s period, which related to warrants granted in June 2015 and May 2016 and expired during 2021. This change was mainly due to the fluctuation in the market price of our common stock (and more specifically the significant increase in the market price of our common stock during the current period), warrant exercises, and non-cash accounting adjustments in connection therewith. This resulted in a significant change in non-cash expense for the period, compared to the prior year’s period.
We had a net loss from continuing operations of approximately $96.2 million for the six months ended June 30, 2022, compared to a net loss from continuing operations of $22.2 million for the six months ended June 30, 2021, an increase in net loss of $74.0 million or 333% from the prior period due to the reasons described above. The majority of our net loss for the six months ended June 30, 2022, was attributable to the loss on hedging activities and amortized deferred loan cost and discount, which was reported as interest expenses, related to the conversion of Convertible Senior Notes, which is a non-cash expense.
Each of our segments’ income (loss) from operations during the six months ended June 30, 2022 and 2021 was as follows (in thousands):
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| | | Six Months Ended June 30, | | $ Change - Favorable (Unfavorable) | | % Change - Favorable (Unfavorable) | |
| Black Oil Segment | | 2022 | | 2021 |
| Revenues | | $ | 21,804 | | | $ | 278 | | | $ | 21,526 | | | 7,743 | % | |
| Cost of revenues (exclusive of depreciation and amortization shown separately below) | | 21,797 | | | 643 | | | (21,154) | | | (3,290) | % | |
| Depreciation and amortization attributable to costs of revenues | | 47 | | | 39 | | | (8) | | | (21) | % | |
| Gross loss | | (40) | | | (404) | | | 364 | | | 90 | % | |
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| Selling, general and administrative expense | | 19,438 | | | 5,223 | | | (14,215) | | | (272) | % | |
| Depreciation and amortization attributable to operating expenses | | 54 | | | 54 | | | — | | | — | % | |
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| Loss from operations | | $ | (19,532) | | | $ | (5,681) | | | $ | (13,851) | | | (244) | % | |
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| Refining Segment | | | | | | | | | |
| Revenues | | $ | 1,001,109 | | | $ | 43,110 | | | $ | 957,999 | | | 2,222 | % | |
| Cost of revenues (exclusive of depreciation and amortization shown separately below) | | 992,852 | | | 40,198 | | | (952,654) | | | (2,370) | % | |
| Depreciation and amortization attributable to costs of revenues | | 3,033 | | | 63 | | | (2,970) | | | (4,714) | % | |
| Gross profit | | 5,224 | | | 2,849 | | | 2,375 | | | 83 | % | |
| Selling, general and administrative expense | | 24,721 | | 1,447 | | (23,274) | | (1,608)% | |
| Depreciation and amortization attributable to operating expenses | | 736 | | — | | (736) | | (100)% | |
| Income (loss) from operations | | $ | (20,233) | | $ | 1,402 | | $ | (21,635) | | (1,543)% | |
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| Recovery Segment | | | | | | | | | |
| Revenues | | $ | 9,143 | | $ | 11,885 | | $ | (2,742) | | (23)% | |
| Cost of revenues (exclusive of depreciation and amortization shown separately below) | | 8,357 | | 10,009 | | 1,652 | | 17% | |
| Depreciation and amortization attributable to costs of revenues | | 156 | | 126 | | (30) | | (24)% | |
| Gross loss | | 630 | | 1,750 | | (1,120) | | (64)% | |
| Selling, general and administrative expense | | 1,264 | | 365 | | (899) | | (246)% | |
| Depreciation and amortization attributable to operating expenses | | — | | — | | — | | —% | |
| Loss from operations | | $ | (634) | | $ | 1,385 | | $ | (2,019) | | (146)% | |
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Our Black Oil segment generated revenues of approximately $21.8 million for the six months ended June 30, 2022, with cost of revenues (exclusive of depreciation and amortization) of $21.8 million, and depreciation and amortization attributable to cost of revenues of $47 thousand. During the six months ended June 30, 2021, these revenues were $0.3 million with cost of revenues (exclusive of depreciation and amortization) of $0.6 million, and depreciation and amortization attributable to cost of revenues of $39 thousand. Loss from operations decreased for the six months ended June 30, 2022, compared to 2021, as a result of higher commodity prices and increased operating expenses during the six months ended June 30, 2022. In addition, a new Marine Division which provided positive revenue and profit for the period, was created at the end of 2021 for blending bunker fuels into the Gulf Coast Market.
Our Refining segment includes the business operations of our Refining and Marketing operations, as well as the Mobile Refinery acquired on April 1, 2022. During the six months ended June 30, 2022, our Refining and Marketing cost of revenues (exclusive of depreciation and amortization) were approximately $993 million, of which the processing costs for the Mobile Refinery were $917 million, and depreciation and amortization attributable to cost of revenues was $3.0 million. Revenues for the
same period were $1 billion, of which $922 million related to the Mobile Refinery operation. During the six months ended June 30, 2021, our Refining and Marketing cost of revenues (exclusive of depreciation and amortization) were $40 million, and depreciation and amortization attributable to cost of revenues of $63 thousand. Revenues for the same period were $43 million.
Our Recovery segment generated revenues of approximately $9 million for the six months ended June 30, 2022, with cost of revenues (exclusive of depreciation and amortization) of $8 million, and depreciation and amortization attributable to cost of revenues of $0.2 million. During the six months ended June 30, 2021, these revenues were $12 million with cost of revenues (exclusive of depreciation and amortization) of $10 million, and depreciation and amortization attributable to cost of revenues of $0.1 million. Income from operations decreased for the six months ended June 30, 2022, compared to 2021, as a result of decreased volumes attributable to our Recovery segment and margins related thereto, through our various facilities. For the six months ended on June 30, 2021, this segment benefited from certain one-time projects that drive increases in volumes as well as revenues and margins from time to time and were completed within 2021.
Our Recovery segment includes the business operations of Vertex Recovery Management as well as our Group III base oil business. Vertex previously acted as Penthol’s exclusive agent to provide marketing, sales, and logistical duties of Group III base oil from the United Arab Emirates to the United States from June 2016 to January 2021. Vertex and Penthol are currently involved in ongoing litigation described in greater detail above under “Part I” -“Item 1. Financial Statements” in the Notes to Consolidated Financial Statements in “Note 3. Concentrations, Significant Customers, Commitments and Contingencies”, under the heading “Litigation”. Revenues for this segment increased 23% as a result of increased commodity prices when compared to the same period in 2021. Volumes of products acquired in our Recovery business were down 12% during the six months ended June 30, 2022, compared to the same period during 2021. This segment periodically participates in project work that is not ongoing, thus we expect to see fluctuations in revenue and income before income taxes from period to period. These projects are typically bid related and can take time to line out and get started; however, we believe these are very good projects for the Company and we anticipate more in the upcoming periods.
The following table sets forth the high and low spot prices during the six months ended June 30, 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) | | $ | 4.35 | | | June 3 | | $ | 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 six months ended June 30, 2021, for our key benchmarks.
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| 2021 | | | | | | | | |
| Benchmark | | High | | Date | | Low | | Date |
| U.S. Gulfcoast No. 2 Waterborne (dollars per gallon) | | $ | 2.10 | | | June 22 | | $ | 1.32 | | | January 4 |
| U.S. Gulfcoast Unleaded 87 Waterborne (dollars per gallon) | | $ | 2.21 | | | June 23 | | $ | 1.36 | | | January 4 |
| U.S. Gulfcoast Residual Fuel No. 6 3% (dollars per barrel) | | $ | 64.92 | | | June 25 | | $ | 45.08 | | | January 4 |
| NYMEX Crude oil (dollars per barrel) | | $ | 74.05 | | | June 25 | | $ | 47.62 | | | January 4 |
| Reported in Platt’s US Marketscan (Gulf Coast) | | | | | | |
We saw an increase in the first six months of 2022, in each of the benchmark commodities we track compared to the same period in 2021. The increase in market prices was a result of 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, term loans, 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 (including Shell, Macquarie and others), and operate with efficient management of overhead costs. Through these relationships, we have historically been able to achieve volume discounts in the procurement of our feedstock, thereby increasing the margins of our segments’ operations. The resulting operating cash flow is crucial to the viability and growth of our existing business lines.
We had total assets of approximately $690.7 million as of June 30, 2022, compared to $266.1 million at December 31, 2021. The increase was mainly due to the acquisition of the Mobile Refinery, increases in accounts receivable and inventory levels, due to the increases in commodity prices and volumes during the six months ended June 30, 2022.
We had total current liabilities of approximately $339.6 million as of June 30, 2022, compared to $49.2 million at December 31, 2021. We had total liabilities of $593.0 million as of June 30, 2022, compared to total liabilities of $192.5 million as of December 31, 2021. The increase in current liabilities was mainly due to the inventory financing liabilities, increase in accounts payable and accrued liabilities as a result of rises in commodity prices and volumes along with the increase in commodity derivative liabilities and the term loan balance, thereof during the six months ended June 30, 2022.
We had working capital of approximately $180.1 million as of June 30, 2022, compared to working capital of $185.0 million as of December 31, 2021. The decrease in working capital from December 31, 2021 to June 30, 2022 is mainly due to the increase in inventory, accounts payable and accrued liabilities, and obligations under our inventory financing agreement (discussed above), for which the inventory was purchased in June 2022 to be used for the product and sale in early of July 2022. Also we had a $3 million break fee paid for the termination of the Sales Agreement with Safety-Kleen, and $8.2 million acquisition costs paid in connection with the Mobile Refinery purchase on April 1, 2022.
Market conditions have improved through the end of 2021 and into 2022, as COVID-19 restrictions have eased and demand for refined products has rebounded. Although commodity prices have rebounded, we are still seeing extreme volatility in commodity pricing, however, the increase in refined product pricing has had a positive impact on our business and overall liquidity.
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 the Mobile Refinery in the future.
The Company’s outstanding debt facilities as of June 30, 2022 and December 31, 2021 (excluding the Convertible Senior Notes) are summarized as follows (in thousands):
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| Creditor | Loan Type | | | | | | | | Balance on June 30, 2022 | | Balance on December 31, 2021 |
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| Term Loan 2025 | Loan | | | | | | | | $ | 165,000 | | | $ | — | |
| John Deere Note | Note | | | | | | | | — | | | 93 | |
| AVT Equipment Lease-HH | Finance Lease | | | | | | | | — | | | 302 | |
| SBA Loan | SBA Loan | | | | | | | | 59 | | | 59 | |
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| VRA Finance lease | Finance Lease | | | | | | | | 45,291 | | | — | |
| Various institutions | Insurance premiums financed | | | | | | | | 9,236 | | | 2,375 | |
| Total | | | | | | | | | $ | 219,586 | | | $ | 2,829 | |
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Future contractual maturities of notes payable are summarized as follows (in thousands):
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| Creditor | Year 1 | | Year 2 | | Year 3 | | Year 4 | | Year 5 | | Thereafter |
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| Totals | $ | 14,013 | | | $ | 9,514 | | | $ | 154,049 | | | $ | 1,605 | | | $ | 1,809 | | | $ | 38,596 | |
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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 (in thousands):
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| | June 30, 2022 |
| Principal Amounts | | $ | 155,000 | |
| Conversion of principal into common stock | | (59,822) | |
| Unamortized discount and issuance costs | | (53,635) | |
| Net Carrying Amount | | $ | 41,543 | |
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 (in thousands):
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| Interest payable | | Year 1 | | Year 2 | | Year 3 | | Year 4 | | Year 5 | | Thereafter |
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| Interest payable | | $ | 6,572 | | | $ | 5,949 | | | $ | 5,949 | | | $ | 5,949 | | | $ | 5,949 | | | $ | 2,974 | |
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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, and capital expenditures related to currently planned growth projects (including the renewable diesel conversion project designed to modify the Mobile Refinery's hydrocracking unit to produce renewable diesel fuel on a standalone basis) 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 $90 to $100 million planned capital project at the facility, the Mobile Refinery is projected to produce approximately 8,000 to 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.
Additionally, we or our affiliates may, at any time and from time to time, retire or repurchase our outstanding Convertible Senior Notes in open-market purchases, privately negotiated transactions, refinancing or otherwise, through cash purchases and/or exchanges for equity or debt. Such repurchases, refinancings or exchanges, if any, will be upon such terms and at such prices as we may determine, and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions, and other factors. Repurchases, if any, will be funded through available cash from operations. The amounts involved may be material.
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 ongoing capital projects at our facilities; and
(5)the number of shares in our public float.
Furthermore, because our common stock is traded on The NASDAQ Capital Market, our stock price may be impacted by factors that are unrelated or disproportionate to our operating performance. These market fluctuations, as well as general economic, political and market conditions, such as recessions, interest rates or international currency fluctuations may adversely affect the market price of our common stock. Additionally, there could be extreme fluctuations in the price 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 six months ended June 30, 2022 compared to the six months ended June 30, 2021, were as follows (in thousands):
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| | Six Months Ended June 30, |
| | 2022 | | 2021 |
| Beginning cash, cash equivalents and restricted cash | | $ | 136,627 | | | $ | 10,995 | |
| Net cash provided by (used in): | | | | |
| Operating activities | | (88,194) | | | 5,045 | |
| Investing activities | | (230,211) | | | (2,745) | |
| Financing activities | | 279,792 | | | 1,772 | |
| Net increase (decrease) in cash, cash equivalents and restricted cash | | (38,613) | | | 4,072 | |
| Ending cash, cash equivalents and restricted cash | | $ | 98,014 | | | $ | 15,067 | |
The analysis of cash flow activities below and the table above, is combined for both continued and discontinued operations, whereas the consolidated statement of cash flows included in this report.
Our primary sources of liquidity are cash flows from the Convertible Senior Notes and Term Loan.
Net cash used in operating activities was approximately $88.2 million for the six months ended June 30, 2022, as compared to net cash provided by operating activities of $5.0 million during the corresponding period in 2021. The primary reason for the increase in cash used by operating activities for the six month period ended June 30, 2022, compared to the same period in 2021, was the Mobile Refinery inventory purchase of $68 million, $13.6 million of acquisition costs related to the Mobile Refinery purchase, $65 million cash settlement on inventory hedging activities, and the cash paid for the termination of the Sales Agreement with Safety-Kleen in January 2022.
Investing activities used cash of approximately $230.2 million for the six months ended June 30, 2022, as compared to having used $2.7 million of cash during the corresponding period in 2021, due mainly to the acquisition of Mobile Refinery during the current period.
Financing activities provided cash of approximately $279.8 million for the six months ended June 30, 2022, as compared to providing cash of $1.8 million during the corresponding period in 2021. Financing activities for the six months ended June 30, 2022 were comprised of proceeds from Term Loan and insurance premium finance of $166 million, from inventory financing of $173 million and from the exercise of options and warrants of $0.7 million offset by the payment on redemption of non-controlling interest of $51 million, distribution to noncontrolling interest of $0.4 million and payment on notes payable and capital leases of $8 million. Financing activities for the six months ended June 30, 2021 were comprised of proceeds from the exercise of options and warrants of $3 million and from line of credit proceeds of $1 million offset by the payment on notes payable and capital leases of $2 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.