UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2024
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO _____________
Commission File Number 001-11476
———————
VERTEX ENERGY, INC.
(Exact name of registrant as specified in its charter)
———————
| Nevada | 94-3439569 | ||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
1331 Gemini Street, Suite 250, Houston, Texas 77058
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 866-660-8156
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Common Stock, $0.001 Par Value Per Share | VTNR | The NASDAQ Stock Market LLC | ||||||
(Nasdaq Capital Market) | ||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☑ Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☑ Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☑ | ||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ | ||||||||
| Emerging growth company | ☐ | ||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
1
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.
¨ Yes ☑ No
As of May 9, 2024, there were 93,514,346 shares of common stock issued and outstanding.
2
TABLE OF CONTENTS
| Page | |||||||||||
| PART I | |||||||||||
| Item 1. | |||||||||||
| Item 2 | |||||||||||
| Item 3. | |||||||||||
| Item 4. | |||||||||||
| PART II | |||||||||||
| Item 1. | |||||||||||
| Item 1A. | |||||||||||
| Item 2. | |||||||||||
| Item 3. | |||||||||||
| Item 4. | |||||||||||
| Item 5. | |||||||||||
| Item 6. | |||||||||||
3
GLOSSARY OF TERMS
Please see the “Glossary” beginning on page 6 of our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the Securities and Exchange Commission on March 7, 2024 (the "Annual Report"), for a list of abbreviations and definitions used throughout this Report. In addition, unless the context otherwise requires and for the purposes of this report only:
•“No. 2 Oil” is a high sulfur diesel oil, which is used in off-road equipment and in the marine industry such as tug boats and ships. It is also used to blend fuel oil and has multiple applications to fuel furnaces (“boilers”). It is a low viscosity, flammable liquid petroleum product.
•“No. 6 Oil” is a lesser grade of oil than No. 2 oil, it is used only in certain applications.
•“Adjusted gross margin” is gross profit (loss) plus or minus unrealized gain or losses on hedging activities and inventory adjustments.
•“Adjusted gross margin per barrel of throughput” is calculated as adjusted gross margin divided by total throughput barrels for the period presented.
•“Adjusted EBITDA” represents net income (loss) from operations plus or minus unrealized gain or losses on hedging activities, RFS costs (mainly RINs), and inventory adjustments, depreciation and amortization, interest expense, taxes, and certain other unusual or non-recurring charges included in selling, general, and administrative expenses.
•“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.
•“BBL” (also “bbl” or “Bbl”) is the abbreviated form for one barrel, 42 U.S. gallons of liquid volume.
•“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.
•“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.
•“Blendstock” is a bulk liquid component combined with other materials to produce a finished petroleum product.
•“BPD” (also “bpd”) is the abbreviated form for barrels per day. This can refer to designed or actual capacity/throughput.
•“Collectors” are typically local businesses that purchase used oil from generators and provide on-site collection services.
•“Crack” means breaking apart crude oil into its component products, including gases like propane, heating fuel, gasoline, light distillates like jet fuel, intermediate distillates like diesel fuel and heavy distillates like grease.
•“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.
•“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 fuel 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.
4
•“Crack Spread USGC 2-1-1” represents the calculation of the crack spread that we believe most closely relates to the crude intakes and products at the Mobile Refinery. We use two barrels of Louisiana Light Sweet crude oil, producing one barrel of USGC CBOB gasoline and one barrel of USGC ULSD.
•“Cutterstock” also known as “cutter stock”, refers to any stream that is blended to adjust various properties of the resulting blend.
•“Distillates” are finished fuel products such as diesel fuels, jet fuel and kerosene.
•“Feedstock” is a product or a combination of products derived from crude oil and destined for further processing in the refining or re-refining industries. It is transformed into one or more components and/or finished products.
•“Fuel Gross Margin” is defined as gross profit (loss) plus or minus operating expenses and depreciation attributable to cost of revenues and other non-fuel items included in cost of revenues including realized and unrealized gain or losses on hedging activities, Renewable Fuel Standard (RFS) costs (mainly related to Renewable Identification Numbers (RINs)), inventory adjustments, fuel financing costs and other revenues and cost of sales items.
•“Fuel Gross Margin Per Barrel of Throughput” is calculated as fuel gross margin divided by total throughput barrels for the period presented.
•“Gasoline Blendstock” is naphthas and various distillate products used for blending or compounding into finished motor gasoline. These components can include reformulated gasoline blendstock for oxygenate blending (RBOB) but exclude oxygenates (alcohols and ethers), butane, and pentanes (an organic compound with properties similar to a butane).
•“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.
•“Group III base oils” are greater than 90 percent saturates, with less than 0.03 percent sulfur and with a viscosity index above 120. Although made from crude oil, Group III base oils are sometimes described as synthesized hydrocarbons.
•“Hydrocarbons” are an organic compound consisting entirely of hydrogen and carbon. When used in the Company’s filings the term generally refers to crude oil and its derivatives.
•“Hydrotreating” means processing feedstock with hydrogen to remove impurities such as sulfur, chlorine, and oxygen and to stabilize the end product.
•“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.
•“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.
•“Lubricating Base Oil” is a crude oil derivative used for lubrication.
•“Marine Diesel Oil” is a blend of petroleum products that is used as a fuel in the marine industry.
5
•“MBL” means one thousand barrels.
•“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.
•“Naphthas” refers to any of various volatile, highly flammable liquid hydrocarbon mixtures used chiefly as solvents and diluents and as raw materials for conversion to gasoline.
•“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.
•“Olefins” are hydrotreated VGO.
•“Other refinery products” include the sales of asphalt, condensate, recovered products, and other petroleum products.
•“Processors” are entities (usually re-refineries) which utilize a processing technology to convert used oil or petroleum by-products into a higher-value feedstock or end-product.
•“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.
•“Re-Refined Base Oil” is the end product of used oil that is first cleansed of its contaminants, such as dirt, water, fuel, and used additives through vacuum distillation. The oil is also generally hydrotreated to remove any remaining chemicals. This process is very similar to what traditional oil refineries do to remove base oil from crude oil. Finally, the re-refined oil is combined with a fresh additive package by blenders to bring it up to industry performance levels.
•“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” is the process of purification of a substance. The refining of liquids is often accomplished by distillation or fractionation. Gases can be refined in this way as well, by being cooled and/or compressed until they liquefy. Gases and liquids can also be refined by extraction with a selective solvent that dissolves away either the substance of interest, or the unwanted impurities.
•“Refining Adjusted EBITDA” represents income (loss) from operations plus or minus unrealized gain or losses on hedging activities, RFS costs (mainly RINs), and inventory adjustments, depreciation and amortization, interest expense, taxes, acquisition costs, environmental reserves and certain other unusual or non-recurring charges included in selling, general, and administrative expenses.
•“Reformate” is a gasoline blending stock produced by catalytic reforming.
•“Renewable Diesel” or “RD” 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.
6
•“Sweet Crude Oil” refers to crude oil containing quantities of sulfur equal to or less than 0.4 percent by weight.
•“Toll Processing/Third Party Processing” is refining or petrochemicals production done on a fee basis. A plant owner puts another party’s feedstock through his equipment and charges for this service. A portion of the product retained by the processor may constitute payment. This form of compensation occurs frequently in refining because the feedstock supplier often is interested in retaining only one part of the output slate.
•“Transmix” is a mix of transportation fuels, usually gasoline and diesel, created by mixing different specification products during pipeline transportation, stripping fuels from barges and bulk fuel terminals. Transmix processing plants distill the transmix back into specification products, such as unleaded gasoline and diesel fuel.
•“UMO” is the abbreviation for used motor oil.
•“USGC CBOB” is the abbreviation for U.S. Gulf Coast Conventional Blendstock for Oxygenate Blending, which means conventional gasoline blendstock intended for blending with oxygenates downstream of the refinery where it was produced.
•“USGC ULSD” is the abbreviation for U.S. Gulf Coast Ultra-low sulfur diesel (ULSD), which is diesel fuel containing a maximum of 15 parts per million (ppm) of sulfur.
•“Used Oil” is any oil that has been refined from crude oil, or any synthetic oil that has been used, and as a result of use or as a consequence of extended storage or spillage has been contaminated with physical or chemical impurities. Examples of used oil include used motor oil, hydraulic oil, transmission fluid, and diesel and transformer 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.
7
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
| VERTEX ENERGY, INC. | |||||||||||
| CONSOLIDATED BALANCE SHEETS | |||||||||||
| (in thousands, except number of shares and par value) | |||||||||||
| (UNAUDITED) | |||||||||||
| March 31, 2024 | December 31, 2023 | ||||||||||
| ASSETS | |||||||||||
| Current assets | |||||||||||
| Cash and cash equivalents | $ | 62,140 | $ | 76,967 | |||||||
| Restricted cash | 3,609 | 3,606 | |||||||||
| Accounts receivable, net | 41,559 | 36,164 | |||||||||
| Inventory | 198,979 | 182,120 | |||||||||
| Prepaid expenses and other current assets | 38,673 | 53,174 | |||||||||
| Total current assets | 344,960 | 352,031 | |||||||||
| Fixed assets, net | 332,949 | 326,111 | |||||||||
| Finance lease right-of-use assets | 63,524 | 64,499 | |||||||||
| Operating lease right-of use assets | 78,802 | 96,394 | |||||||||
| Intangible assets, net | 10,789 | 11,541 | |||||||||
| Other assets | 4,029 | 4,048 | |||||||||
| TOTAL ASSETS | $ | 835,053 | $ | 854,624 | |||||||
| LIABILITIES AND EQUITY | |||||||||||
| Current liabilities | |||||||||||
| Accounts payable | $ | 69,796 | $ | 75,004 | |||||||
| Accrued expenses and other current liabilities | 69,240 | 73,636 | |||||||||
| Finance lease liability-current | 2,497 | 2,435 | |||||||||
| Operating lease liability-current | 13,281 | 20,296 | |||||||||
| Current portion of long-term debt, net | 12,524 | 16,362 | |||||||||
| Obligations under inventory financing agreements, net | 169,656 | 141,093 | |||||||||
Total current liabilities | 336,994 | 328,826 | |||||||||
| Long-term debt, net | 177,772 | 170,701 | |||||||||
| Finance lease liability-long-term | 65,576 | 66,206 | |||||||||
| Operating lease liability-long-term | 64,345 | 74,444 | |||||||||
| Deferred tax liabilities | 2,776 | 2,776 | |||||||||
| Derivative warrant liability | 3,249 | 9,907 | |||||||||
| Other liabilities | 1,377 | 1,377 | |||||||||
| Total liabilities | 652,089 | 654,237 | |||||||||
8
| VERTEX ENERGY, INC. | |||||||||||
| CONSOLIDATED BALANCE SHEETS | |||||||||||
| (in thousands, except number of shares and par value) | |||||||||||
| (UNAUDITED) | |||||||||||
| March 31, 2024 | December 31, 2023 | ||||||||||
| EQUITY | |||||||||||
Common stock, $0.001 par value per share; 750,000,000 shares authorized; 93,514,346 and 93,514,346 shares issued and outstanding at March 31, 2024 and December 31, 2023, respectively. | 94 | 94 | |||||||||
| Additional paid-in capital | 384,063 | 383,632 | |||||||||
| Accumulated deficit | (205,113) | (187,379) | |||||||||
| Total Vertex Energy, Inc. shareholders' equity | 179,044 | 196,347 | |||||||||
| Non-controlling interest | 3,920 | 4,040 | |||||||||
| Total equity | 182,964 | 200,387 | |||||||||
| TOTAL LIABILITIES AND EQUITY | $ | 835,053 | $ | 854,624 | |||||||
See accompanying condensed notes to the consolidated financial statements.
9
VERTEX ENERGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(UNAUDITED)
| Three Months Ended March 31, | ||||||||||||||
| 2024 | 2023 | |||||||||||||
| Revenues | $ | 695,326 | $ | 691,142 | ||||||||||
| Cost of revenues (exclusive of depreciation and amortization shown separately below) | 652,034 | 619,352 | ||||||||||||
| Depreciation and amortization attributable to costs of revenues | 8,186 | 4,337 | ||||||||||||
| Gross profit | 35,106 | 67,453 | ||||||||||||
| Operating expenses: | ||||||||||||||
| Selling, general and administrative expenses (exclusive of depreciation and amortization shown separately below) | 39,782 | 41,942 | ||||||||||||
| Depreciation and amortization attributable to operating expenses | 1,104 | 1,016 | ||||||||||||
| Total operating expenses | 40,886 | 42,958 | ||||||||||||
| Income (loss) from operations | (5,780) | 24,495 | ||||||||||||
| Other income (expense): | ||||||||||||||
| Other income (expenses) | (1,049) | 1,653 | ||||||||||||
| Gain (loss) on change in value of derivative warrant liability | 6,658 | (9,185) | ||||||||||||
| Interest expense | (17,683) | (12,477) | ||||||||||||
| Total other expense | (12,074) | (20,009) | ||||||||||||
| Income (loss) from continuing operations before income tax | (17,854) | 4,486 | ||||||||||||
| Income tax expense | — | (1,013) | ||||||||||||
| Income (loss) from continuing operations | (17,854) | 3,473 | ||||||||||||
| Income from discontinued operations, net of tax (see note 22) | — | 50,340 | ||||||||||||
| Net income (loss) | (17,854) | 53,813 | ||||||||||||
| Net loss attributable to non-controlling interest from continuing operations | (120) | (50) | ||||||||||||
| Net income (loss) attributable to Vertex Energy, Inc. | (17,734) | 53,863 | ||||||||||||
| Net income (loss) attributable to common shareholders from continuing operations | (17,734) | 3,523 | ||||||||||||
| Net income attributable to common shareholders from discontinued operations, net of tax | — | 50,340 | ||||||||||||
| Net income (loss) attributable to common shareholders | $ | (17,734) | $ | 53,863 | ||||||||||
| Basic income (loss) per common share | ||||||||||||||
| Continuing operations | $ | (0.19) | $ | 0.05 | ||||||||||
| Discontinued operations, net of tax | — | 0.66 | ||||||||||||
| Basic income (loss) per common share | $ | (0.19) | $ | 0.71 | ||||||||||
| Diluted income (loss) per common share | ||||||||||||||
| Continuing operations | $ | (0.19) | $ | 0.04 | ||||||||||
| Discontinued operations, net of tax | — | 0.64 | ||||||||||||
| Diluted income (loss) per common share | $ | (0.19) | $ | 0.68 | ||||||||||
| Shares used in computing earnings per share | ||||||||||||||
| Basic | 93,514 | 75,689 | ||||||||||||
| Diluted | 93,514 | 78,996 | ||||||||||||
See accompanying condensed notes to the consolidated financial statements.
10
VERTEX ENERGY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except par value)
(UNAUDITED)
| Three Months Ended March 31, 2024 | |||||||||||||||||||||||||||||||||||
| Common Stock | |||||||||||||||||||||||||||||||||||
| Shares | $0.001 Par | Additional Paid-In Capital | Accumulated Deficit | Non-controlling Interest | Total Equity | ||||||||||||||||||||||||||||||
| Balance on January 1, 2024 | 93,515 | $ | 94 | $ | 383,632 | $ | (187,379) | $ | 4,040 | $ | 200,387 | ||||||||||||||||||||||||
| Stock based compensation expense | — | — | 431 | — | — | 431 | |||||||||||||||||||||||||||||
| Net loss | — | — | — | (17,734) | (120) | (17,854) | |||||||||||||||||||||||||||||
| Balance on March 31, 2024 | 93,515 | $ | 94 | $ | 384,063 | $ | (205,113) | $ | 3,920 | $ | 182,964 | ||||||||||||||||||||||||
| Three Months Ended March 31, 2023 | |||||||||||||||||||||||||||||||||||
| Common Stock | |||||||||||||||||||||||||||||||||||
| Shares | $0.001 Par | Additional Paid-In Capital | Accumulated Deficit | Non-controlling Interest | Total Equity | ||||||||||||||||||||||||||||||
| Balance on January 1, 2023 | 75,670 | $ | 76 | $ | 279,552 | $ | (115,893) | $ | 1,685 | $ | 165,420 | ||||||||||||||||||||||||
| Exercise of options | 166 | — | 209 | — | — | 209 | |||||||||||||||||||||||||||||
| Stock based compensation expense | — | — | 365 | — | — | 365 | |||||||||||||||||||||||||||||
| Non-controlling shareholder contribution | — | — | — | — | 980 | 980 | |||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | 53,863 | (50) | 53,813 | |||||||||||||||||||||||||||||
| Balance on March 31, 2023 | 75,836 | $ | 76 | $ | 280,126 | $ | (62,030) | $ | 2,615 | $ | 220,787 | ||||||||||||||||||||||||
See accompanying condensed notes to the consolidated financial statements.
11
VERTEX ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(UNAUDITED)
| Three Months Ended | |||||||||||
| March 31, 2024 | March 31, 2023 | ||||||||||
| Cash flows from operating activities | |||||||||||
| Net income (loss) | $ | (17,854) | $ | 53,813 | |||||||
| Income from discontinued operations, net of tax | — | 50,340 | |||||||||
| Income (loss) from continuing operations | (17,854) | 3,473 | |||||||||
| Adjustments to reconcile net income (loss) from continuing operations to cash used in operating activities | |||||||||||
| Stock based compensation expense | 431 | 365 | |||||||||
| Depreciation and amortization | 9,290 | 5,353 | |||||||||
| Deferred income tax expense | — | 1,013 | |||||||||
| Loss on lease modification | 35 | — | |||||||||
| Loss on sale of assets | 691 | 3 | |||||||||
| Increase in allowance for credit losses | 19 | 882 | |||||||||
| Increase (decrease) in fair value of derivative warrant liability | (6,658) | 9,185 | |||||||||
| (Gain) loss on commodity derivative contracts | 1,322 | (1,516) | |||||||||
| Net cash settlements on commodity derivatives | (2,292) | 3,519 | |||||||||
| Amortization of debt discount and deferred costs | 4,758 | 4,572 | |||||||||
| Changes in operating assets and liabilities | |||||||||||
| Accounts receivable and other receivables | (4,180) | (26,291) | |||||||||
| Inventory | (16,859) | (52,553) | |||||||||
| Prepaid expenses and other current assets | 14,710 | (18,103) | |||||||||
| Accounts payable | (5,250) | 11,005 | |||||||||
| Accrued expenses | (7,308) | 22,486 | |||||||||
| Other assets | 19 | (44) | |||||||||
| Net cash used in operating activities from continuing operations | (29,126) | (36,651) | |||||||||
| Cash flows from investing activities | |||||||||||
| Purchase of fixed assets | (14,726) | (73,936) | |||||||||
| Proceeds from sale of discontinued operation | — | 87,238 | |||||||||
| Proceeds from sale of fixed assets | 2,576 | — | |||||||||
| Net cash provided by (used in) investing activities from continuing operations | (12,150) | 13,302 | |||||||||
| Cash flows from financing activities | |||||||||||
| Payments on finance leases | (586) | (310) | |||||||||
| Proceeds from exercise of options and warrants to common stock | — | 209 | |||||||||
| Contributions received from noncontrolling interest | — | 980 | |||||||||
| Net change on inventory financing agreements | 28,313 | (11,284) | |||||||||
| Proceeds from note payable | 3,175 | — | |||||||||
| Payments on note payable | (4,450) | (17,165) | |||||||||
| Net cash provided by (used in) financing activities from continuing operations | 26,452 | (27,570) | |||||||||
| Discontinued operations: | |||||||||||
| Net cash provided by (used in) operating activities | — | (150) | |||||||||
| Net cash provided by (used in) discontinued operations | — | (150) | |||||||||
| Net decrease in cash, cash equivalents and restricted cash | (14,824) | (51,069) | |||||||||
| Cash, cash equivalents, and restricted cash at beginning of the period | 80,573 | 146,187 | |||||||||
| Cash, cash equivalents, and restricted cash at end of period | $ | 65,749 | $ | 95,118 | |||||||
See accompanying condensed notes to the consolidated financial statements.
12
VERTEX ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(UNAUDITED)
(Continued)
The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the consolidated balance sheets to the same amounts shown in the consolidated statements of cash flows (in thousands).
| Three Months Ended | |||||||||||
| March 31, 2024 | March 31, 2023 | ||||||||||
| Cash and cash equivalents | $ | 62,140 | $ | 86,689 | |||||||
| Restricted cash | 3,609 | 8,429 | |||||||||
| Cash and cash equivalents and restricted cash as shown in the consolidated statements of cash flows | $ | 65,749 | $ | 95,118 | |||||||
| SUPPLEMENTAL INFORMATION | |||||||||||
| Cash paid for interest | $ | 4,811 | $ | 10,124 | |||||||
| Cash paid for taxes | $ | — | $ | — | |||||||
| NON-CASH INVESTING AND FINANCING TRANSACTIONS | |||||||||||
| ROU assets obtained from new finance leases | $ | 18 | $ | 15,024 | |||||||
| ROU assets obtained from new operating leases | $ | 74 | $ | 15,078 | |||||||
| ROU assets disposed under operating leases | $ | (17,666) | $ | — | |||||||
See accompanying notes to the consolidated financial statements.
13
VERTEX ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2024
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION AND NATURE OF OPERATIONS
Vertex Energy, Inc. (the "Company" or "Vertex Energy") is an energy transition company focused on the production and distribution of conventional and alternative fuels. We operate used motor oil processing plants in Houston, Texas, Port Arthur, Texas, and Marrero, Louisiana.
As of April 1, 2022, we own a refinery in Mobile, Alabama (the “Mobile Refinery”) with an operable refining capacity of 75,000 barrels per day (“bpd”) and more than 3.2 million barrels of storage capacity. At the time of the acquisition, the Company also entered into an inventory financing agreement. See Note 10 “Inventory Financing Agreement” for additional information.
The accompanying unaudited interim consolidated financial statements of the Company 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, 2023, contained in the Company's annual report, as filed with the SEC on Form 10-K on March 7, 2024 (the "Form 10-K").
Refining and Marketing
Effective April 1, 2022, we completed the acquisition of a 75,000 bpd crude oil refinery ten miles north of Mobile, in Saraland, Alabama (the “Mobile Refinery”) and related logistics assets, which include a deep-water draft, bulk loading terminal facility with 3.2 million barrels (bbls) of storage capacity for crude oil and associated refined petroleum products located in Mobile, Alabama (the “Blakeley Island Terminal”). The terminal includes a dock for loading and unloading vessels with a pipeline tie-in, as well as the related logistics infrastructure of a high-capacity truck rack 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.
Additionally, Vertex Energy aggregates 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. The Company has a toll-based processing agreement in place with Monument Chemical Port Arthur, LLC (“Monument Chemical”) to re-refine these feedstock streams, under the Company’s direction, into various end products. Monument Chemical uses industry standard processing technologies to re-refine the feedstock into pygas, gasoline blendstock and marine fuel cutterstock. The Company sells the re-refined products directly to end customers or to processing facilities for further refinement. In addition, we are distributing refined motor fuels such as gasoline, blended gasoline products and diesel used as engine fuels, to third party customers who typically resell these products to retailers and end consumers.
Black Oil and Recovery
Through its Black Oil segment, which has been operational since 2001, Vertex Energy aggregates and sells used motor oil. The Company has a network of approximately 30 suppliers that collect used oil from businesses such as oil change service stations, automotive repair shops, manufacturing facilities, petroleum refineries, and petrochemical manufacturing operations. The Company procures the used oil from collectors and manages the logistics of transport, storage and delivery to its customers. Typically, the used oil is sold in bulk to ensure the efficient delivery by truck, rail, or barge. In many cases, there are contractual procurement and sale agreements with the suppliers and customers, respectively. The Company believes these contracts are beneficial to all parties involved because they help ensure a minimum volume is procured from collectors, a minimum volume is sold to the customers, and the Company is insulated from inventory risk by a spread between the costs to acquire used oil and the revenues received from the sale and delivery of used oil. In addition, the Company operates its own re-refining operations at the Cedar Marine Terminal, in Baytown, Texas, which uses the Company's proprietary Thermal Chemical Extraction Process (“TCEP”) technology to re-refine the used oil into marine fuel cutterstock (when such use makes economic sense) and a higher-value feedstock for further processing. The finished product can then be sold by barge as a fuel oil cutterstock and a feedstock component for major refineries. 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 end users to utilize in a refining process or a fuel oil blend.
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Discontinued operations of Vertex include our Heartland Assets and Operations. Refer to Note 22, "Discontinued Operations" for additional information.
Through its Recovery segment, Vertex Energy aggregates and sells ferrous and non-ferrous recyclable metal products that are recovered from manufacturing and consumption.
Use of Estimates
The preparation of financial statements conforming with generally accepted accounting principles in the United States (“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.
NOTE 2. SUMMARY OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
With the exception of the accounting policies below, there have been no new or material changes to the significant accounting policies discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.
Liquidity
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. The Company has cash and cash equivalents of $62.1 million as of March 31, 2024. As shown in the accompanying unaudited consolidated financial statements, the Company generated a net loss from continuing operations of $17.9 million during the three months ended March 31, 2024. The Company had cash outflows from operating activities from continuing operations, which were $29.1 million during the three months ended March 31, 2024. The Company has cash outflows from investing activities from continuing operations due to its investments in capital expenditures partially offset by proceeds of real property sales. The Company has generated significant cash inflows from financing activities from continuing operations, primarily attributed to proceeds from inventory financing agreement.
Restricted cash as of March 31, 2024, and December 31, 2023, consisted of a $2.0 million deposit in a bank for financing of a short-term equipment lease, and $1.5 million held in an escrow account in connection with the sale of Vertex Refining OH, LLC (“Vertex OH”), and $0.1 million deposit in a money market account to serve as collateral for payment of a credit card.
Going Concern
The accompanying consolidated financial statements of the Company have been prepared assuming the Company will continue as a going concern. The going concern basis of presentation assumes that the Company will continue in operation one year after the date these financial statements are issued and will be able to realize its assets and discharge its liabilities and commitments in the normal course of business. The evaluation of going concern under the accounting guidance requires significant judgment which involves the Company considering that it has historically incurred losses in recent years as it has prepared to grow its business through acquisition opportunities. The Company must also consider its current liquidity as well as future market and economic conditions that may be deemed outside the control of the Company as it relates to obtaining financing and generating future profits.
As of March 31, 2024, the Company has evaluated its ability to continue as a going concern. Management has considered various factors, including historical operating results, liquidity, financial condition, and other relevant conditions and events. Based on this evaluation, management has determined that there is substantial doubt about the Company's ability to continue as a going concern within one year of the financial statement issuance date primarily due to the Term Loan (see below “Note 15. Financing Agreements”) maturing on April 1, 2025. Management's plans to mitigate the going concern risk include current efforts to refinance the debt of the Company with a new lender group, and the various efforts underway to reduce and minimize costs throughout the organization. In addition, the Company believes it has the ability, if necessary, to raise additional capital through the capital equity markets. However, there can be no assurance that these plans will be successful.
The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Investors and other users of the financial statements are encouraged to consider this information when assessing the Company's financial position and prospects.
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New Accounting Pronouncements
The Company has not identified any recent accounting pronouncements that are expected to have a material impact on our financial condition, results of operations or cash flows upon adoption.
NOTE 3. COMMITMENTS AND CONTINGENCIES
Litigation
The Company, in its normal course of business, is involved in various claims and legal action. In the opinion of management, the outcome of these claims and actions will not have a material adverse impact upon the financial position of the Company. We are currently party to the following material litigation proceedings:
Doucet litigation:
Vertex Refining LA, LLC (“Vertex Refining LA”), the wholly-owned subsidiary of Vertex Operating, LLC (“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.
Penthol litigation:
On November 17, 2020, Vertex Energy Operating, LLC (“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.
On February 8, 2021, Penthol filed a complaint against Vertex in the United States District Court for the Southern District of Texas; Civil Action No. 4:21-CV- 416 (the “Complaint”). The parties agreed to move the pending claims and defenses in the Texas state court lawsuit into the federal court lawsuit.
On March 7, 2024, the Judge in the action issued a Final Judgment and Findings of Fact & Conclusions of Law. In sum, Penthol lost all of its claims against Vertex, including all of its breach of contract theories. Vertex won its unpaid commission claim in the amount of $1.4 million plus five percent interest on the unpaid claim amount.
Vertex is presently considering whether to appeal the judgment and it is also possible that Penthol appeals the judgment against it.
Putative Class Action Litigation:
On April 13, 2023, William C. Passmore filed a putative class action lawsuit against the Company; Benjamin P. Cowart, our Chief Executive Officer and Chairman; and Chris Carlson, our Chief Financial Officer; in the United States District Court for the Southern District of Alabama (Southern Division). In May 2023 and June 2023, additional plaintiffs filed virtually identical putative class action lawsuits against the same three defendants, the first of which was filed in the same courthouse and the second of which was filed in the United States District Court for the Southern District of Texas (Houston Division). These three putative class action lawsuits are substantially similar and allege that the Company, through Messrs. Cowart and Carlson, issued materially false and misleading statements, or omitted material information, regarding the projected future financial performance of the Mobile Refinery in 2022. The plaintiffs have asserted claims for violations of Section 10(b) of the Exchange Act, and Rule 10b-5 promulgated thereunder, and Section 20(a) of the Exchange Act, against all defendants. On January 24, 2024, after considering party briefing, the United States District Court for the Southern District of Alabama ordered that the three putative class action lawsuits be consolidated and transferred to the Southern District of Texas for further proceedings. On February 1, 2024, the court issued an order appointing lead plaintiffs and lead counsel for the putative class, who then filed a consolidated amended complaint. The Company anticipates moving to dismiss the claims in the consolidated amended complaint, with briefing on the motion currently scheduled to be complete by August 20, 2024.
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Shareholder Derivative Lawsuits:
In June 2023, two plaintiffs filed shareholder derivative lawsuits against certain Directors (both current and former) and Officers in the state courts of Texas and Nevada. The suits are substantially similar and allege that the Directors and Officers of the Company breached duties owed to the Company by allowing the Company to issue materially false and misleading statements, or failing to disclose material information, regarding the projected future financial performance of the Mobile Refinery in 2022. Both the Texas and Nevada plaintiffs have asserted claims for breach of fiduciary duty, and the Texas plaintiff has asserted an additional claim for unjust enrichment. Plaintiffs seek multiple forms of relief, including high-level resolutions for amendments to the Company’s corporate governance documents. On July 19, 2023, the Texas court granted the plaintiff’s notice of non-suit as to two current Directors, who were only named in the Texas case, dismissing them from the lawsuit without prejudice, and on August 28, 2023, the Court granted the parties’ joint motion to stay the derivative lawsuit pending the outcome of an anticipated motion to dismiss in the putative securities class action. Similarly, on October 5, 2023, the Nevada court granted the parties’ joint stipulation to stay the case pending the outcome of the anticipated motion to dismiss in the putative securities class action.
The Company has also been informed that a third shareholder derivative lawsuit was filed in the United States District Court for the Southern District of Texas on February 26, 2024, against certain Directors and Officers of the Company. The factual allegations in the third derivative lawsuit are substantially similar to the derivative lawsuits that are stayed in Texas and Nevada. This third derivative lawsuit, however, contains five claims in total, including claims for breach of fiduciary duty, aiding and abetting breach of fiduciary duty, unjust enrichment, violations of Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder, and waste of corporate assets. The Company plans to seek a stay of the third derivative lawsuit that is similar to the stay entered in the other derivative lawsuits, as well as dismissal of the two Directors who were dismissed from the first derivative lawsuit in Texas state court.
The Company has retained counsel to respond to the putative class action and the shareholder derivative lawsuits, and its assessment of the respective allegations is ongoing. All defendants intend to vigorously defend against the allegations.
At this stage of the lawsuits described above, we are unable to anticipate the ultimate impact, if any, that the legal proceedings may have on the consolidated financial position, liquidity, results of operations, or cash flows of the Company. As a result, we have not estimated a range of potential exposure for amounts, if any, that might become payable in connection with these matters and reserves have not been established. If an unfavorable ruling or development were to occur in these or other possible legal proceedings and claims, there exists the possibility of a material adverse impact on our business, results of operations, prospects, cash flows, or financial position and it is possible that an adverse outcome in any of such matters may have a material adverse impact on the Company.
Environmental Matters
Like other petroleum refiners, we are subject to federal, state, and local environmental laws and regulations. These laws generally provide for control of pollutants released into the environment and require responsible parties to undertake remediation of hazardous waste disposal. These governmental entities may also propose or assess fines or require corrective actions for these asserted violations. Except as disclosed below, we do not anticipate that any such matters currently known to management will have a material impact on our financial condition, results of operations, or cash flows. As of March 31, 2024 and December 31, 2023, we reserved $1.4 million for anticipated environment clean-up costs.
NOTE 4. NON-CONTROLLING INTERESTS
Vertex Recovery Management LA, LLC
On May 25, 2016, Vertex Recovery Management, LLC, our wholly-owned subsidiary ("VRM") and Industrial Pipe, Inc. ("Industrial Pipe"), formed a joint venture through a Louisiana limited liability company, Vertex Recovery Management LA, LLC ("VRMLA"). VRM owns 51% and Industrial Pipe owns 49% of VRMLA. VRMLA is currently buying and preparing ferrous and non-ferrous scrap intended for large haul barge sales. We consolidated 100% of VRMLA's net loss for the period ended March 31, 2024 and 2023, respectively, and then added the loss attributable to the non-controlling interest back to the Company's "Net income attributable to Vertex Energy, Inc." in the Consolidated Statement of Operations. The below table represents the net loss of VRMLA for the periods ended March 31, 2024 and 2023 (in thousands).
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| Three Months Ended March 31, | ||||||||||||||
| 2024 | 2023 | |||||||||||||
| Net loss consolidated | $ | (245) | $ | (102) | ||||||||||
| Loss attributed to Non-controlling entity | $ | (120) | $ | (50) | ||||||||||
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NOTE 5. REVENUES
The following tables present our revenues disaggregated by geographical market and revenue source (in thousands):
| Three Months Ended March 31, 2024 | |||||||||||||||||||||||
| Refining & Marketing | Black Oil & Recovery | Corporate and Eliminations | Consolidated | ||||||||||||||||||||
| Primary Geographical Markets | |||||||||||||||||||||||
| Gulf Coast | $ | 657,707 | $ | 38,641 | $ | (1,022) | $ | 695,326 | |||||||||||||||
| Sources of Revenue | |||||||||||||||||||||||
| Refined products: | |||||||||||||||||||||||
| Gasolines | $ | 133,151 | $ | — | $ | — | $ | 133,151 | |||||||||||||||
| Jet Fuels | 136,137 | — | — | 136,137 | |||||||||||||||||||
| Diesel | 124,701 | — | — | 124,701 | |||||||||||||||||||
| Renewable diesel | 75,803 | — | — | 75,803 | |||||||||||||||||||
Other refinery products (1) | 180,967 | 31,724 | (1,022) | 211,669 | |||||||||||||||||||
| Re-refined products: | |||||||||||||||||||||||
| Pygas | 3,867 | — | — | 3,867 | |||||||||||||||||||
Metals (2) | — | 3,442 | — | 3,442 | |||||||||||||||||||
Other re-refined products (3) | — | 1,773 | — | 1,773 | |||||||||||||||||||
| Services: | |||||||||||||||||||||||
| Terminalling | 3,081 | — | — | 3,081 | |||||||||||||||||||
| Oil collection services | — | 1,702 | — | 1,702 | |||||||||||||||||||
| Total revenues | $ | 657,707 | $ | 38,641 | $ | (1,022) | $ | 695,326 | |||||||||||||||
| Three Months Ended March 31, 2023 | |||||||||||||||||||||||
| Refining & Marketing | Black Oil & Recovery | Corporate and Eliminations | Consolidated | ||||||||||||||||||||
| Primary Geographical Markets | |||||||||||||||||||||||
| Gulf Coast | $ | 659,328 | $ | 34,547 | $ | (2,733) | $ | 691,142 | |||||||||||||||
| Sources of Revenue | |||||||||||||||||||||||
| Refined products: | |||||||||||||||||||||||
| Gasolines | $ | 147,721 | $ | — | $ | — | $ | 147,721 | |||||||||||||||
| Jet Fuels | 142,375 | — | — | 142,375 | |||||||||||||||||||
| Diesel | 182,456 | — | — | 182,456 | |||||||||||||||||||
Other refinery products (1) | 180,490 | 29,423 | (2,733) | 207,180 | |||||||||||||||||||
| Re-refined products: | |||||||||||||||||||||||
| Pygas | 3,835 | — | — | 3,835 | |||||||||||||||||||
Metals (2) | — | 3,413 | — | 3,413 | |||||||||||||||||||
Other re-refined products (3) | 518 | 998 | — | 1,516 | |||||||||||||||||||
| Services: | |||||||||||||||||||||||
| Terminalling | 1,933 | — | — | 1,933 | |||||||||||||||||||
| Oil collection services | — | 713 | — | 713 | |||||||||||||||||||
| Total revenues | $ | 659,328 | $ | 34,547 | $ | (2,733) | $ | 691,142 | |||||||||||||||
(1) Other refinery products include the sales of base oil, VGO (vacuum gas oil), cutterstock and Hydrotreated VGO and other petroleum products.
(2) Metals consist of recoverable ferrous and non-ferrous recyclable metals from manufacturing and consumption. Scrap metal can be recovered from pipes, barges, boats, building supplies, surplus equipment, tanks, and other items consisting of metal composition. These materials are segregated, processed, cut-up and sent back to a steel mill for re-purposing.
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(3) Other re-refinery products include the sales of asphalt, condensate, recovered products, and other petroleum products.
NOTE 6. SEGMENT REPORTING
The Refining and Marketing segment consists primarily of the sale of gasoline, diesel and jet fuel produced at the Mobile Refinery as well as pygas and industrial fuels, which are produced at a third-party facility. During the second quarter of 2023, the Mobile Refinery began processing soybean oil into renewable diesel.
The Black Oil and Recovery segment consists primarily of the sale of (a) petroleum products which include base oil and industrial fuels—which consist of used motor oils, cutterstock and fuel oil generated by our facilities; (b) oil collection services—which consist of used oil sales, burner fuel sales, antifreeze sales and service charges; (c) the sale of other re-refinery products including asphalt, condensate, recovered products, and used motor oil; (d) transportation revenues; (e) the sale of VGO/marine fuel; (f) the sale of ferrous and non-ferrous recyclable metal products that are recovered from manufacturing and consumption; and (g) revenues generated from trading/marketing of Group III Base Oils. The Black Oil and Recovery segment excludes all property and assets owned by Vertex OH, including inventory associated with the Heartland Refinery, and all real and leased property and permits owned by Vertex OH, and all used motor oil collection and recycling assets and operations owned by Vertex OH (collectively with the Heartland Refinery, the “Heartland Assets and Operations”), which are presented herein as discontinued operations.
We also disaggregate our revenue by product category for each of our segments, as we believe such disaggregation helps depict how our revenue and cash flows are affected by economic factors.
Segment information for the three months ended March 31, 2024 and 2023 is as follows (in thousands):
| THREE MONTHS ENDED MARCH 31, 2024 | ||||||||||||||||||||||||||
| Refining & Marketing | Black Oil & Recovery | Corporate and Eliminations | Total | |||||||||||||||||||||||
| Revenues: | ||||||||||||||||||||||||||
Refined products | $ | 650,759 | $ | 31,724 | $ | (1,022) | $ | 681,461 | ||||||||||||||||||
Re-refined products | 3,867 | 5,215 | — | 9,082 | ||||||||||||||||||||||
| Services | 3,081 | 1,702 | — | 4,783 | ||||||||||||||||||||||
| Total revenues | 657,707 | 38,641 | (1,022) | 695,326 | ||||||||||||||||||||||
| Cost of revenues (exclusive of depreciation and amortization shown separately below) | 622,974 | 30,082 | (1,022) | 652,034 | ||||||||||||||||||||||
| Depreciation and amortization attributable to costs of revenues | 6,541 | 1,645 | — | 8,186 | ||||||||||||||||||||||
| Gross profit | 28,192 | 6,914 | — | 35,106 | ||||||||||||||||||||||
| Selling, general and administrative expenses | 26,147 | 5,397 | 8,238 | 39,782 | ||||||||||||||||||||||
| Depreciation and amortization attributable to operating expenses | 793 | 72 | 239 | 1,104 | ||||||||||||||||||||||
| Income (loss) from operations | 1,252 | 1,445 | (8,477) | (5,780) | ||||||||||||||||||||||
| Other income (expenses) | ||||||||||||||||||||||||||
| Other expense | (685) | (359) | (5) | (1,049) | ||||||||||||||||||||||
| Gain on change in derivative liability | — | — | 6,658 | 6,658 | ||||||||||||||||||||||
| Interest expense | (4,747) | (96) | (12,840) | (17,683) | ||||||||||||||||||||||
| Total other expense | (5,432) | (455) | (6,187) | (12,074) | ||||||||||||||||||||||
| Income (loss) from continuing operations before income tax | $ | (4,180) | $ | 990 | $ | (14,664) | $ | (17,854) | ||||||||||||||||||
| Capital expenditures | $ | 11,299 | $ | 3,427 | $ | — | $ | 14,726 | ||||||||||||||||||
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| THREE MONTHS ENDED MARCH 31, 2023 | ||||||||||||||||||||||||||
| Refining & Marketing | Black Oil & Recovery | Corporate and Eliminations | Total | |||||||||||||||||||||||
| Revenues: | ||||||||||||||||||||||||||
Refined products | $ | 653,042 | $ | 29,423 | $ | (2,733) | $ | 679,732 | ||||||||||||||||||
Re-refined products | 4,353 | 4,411 | — | 8,764 | ||||||||||||||||||||||
| Services | 1,933 | 713 | — | 2,646 | ||||||||||||||||||||||
| Total revenues | 659,328 | 34,547 | (2,733) | 691,142 | ||||||||||||||||||||||
| Cost of revenues (exclusive of depreciation and amortization shown separately below) | 589,812 | 30,418 | (878) | 619,352 | ||||||||||||||||||||||
| Depreciation and amortization attributable to costs of revenues | 3,294 | 1,043 | — | 4,337 | ||||||||||||||||||||||
| Gross profit | 66,222 | 3,086 | (1,855) | 67,453 | ||||||||||||||||||||||
| Selling, general and administrative expenses | 26,486 | 4,799 | 10,657 | 41,942 | ||||||||||||||||||||||
| Depreciation and amortization attributable to operating expenses | 808 | 38 | 170 | 1,016 | ||||||||||||||||||||||
| Income (loss) from operations | 38,928 | (1,751) | (12,682) | 24,495 | ||||||||||||||||||||||
| Other income (expenses) | ||||||||||||||||||||||||||
| Other income (expense) | — | 1,655 | (2) | 1,653 | ||||||||||||||||||||||
| Loss on change in derivative liability | — | — | (9,185) | (9,185) | ||||||||||||||||||||||
| Interest expense | (3,876) | (57) | (8,544) | (12,477) | ||||||||||||||||||||||
| Total other income (expense) | (3,876) | 1,598 | (17,731) | (20,009) | ||||||||||||||||||||||
| Income (loss) from continuing operations before income tax | $ | 35,052 | $ | (153) | $ | (30,413) | $ | 4,486 | ||||||||||||||||||
| Capital expenditures | $ | 69,908 | $ | 4,028 | $ | — | $ | 73,936 | ||||||||||||||||||
Total assets by segment were as follows (in thousands):
As of March 31, 2024 | ||||||||||||||||||||||||||
| Refining & Marketing | Black Oil & Recovery | Corporate and Eliminations | Consolidated | |||||||||||||||||||||||
| Total assets | $ | 655,271 | $ | 110,131 | $ | 69,651 | $ | 835,053 | ||||||||||||||||||
As of December 31, 2023 | ||||||||||||||||||||||||||
| Refining & Marketing | Black Oil & Recovery | Corporate and Eliminations | Consolidated | |||||||||||||||||||||||
| Total assets | $ | 661,101 | $ | 106,524 | $ | 86,999 | $ | 854,624 | ||||||||||||||||||
Segment assets for the Refining and Marketing and Black Oil and Recovery segments consist of property, plant, and equipment, right-of-use assets, intangible assets, accounts receivable, inventories and other assets. Assets for the corporate unallocated amounts consist of property, plant, and equipment used at the corporate headquarters, intangible assets, derivative commodity assets and cash.
NOTE 7. ACCOUNTS RECEIVABLE
Accounts receivable, net, consists of the following at March 31, 2024 and December 31, 2023 (in thousands):
| March 31, 2024 | December 31, 2023 | ||||||||||
| Accounts receivable trade | $ | 42,886 | $ | 37,473 | |||||||
| Allowance for credit losses | (1,327) | (1,309) | |||||||||
| Accounts receivable, net | $ | 41,559 | $ | 36,164 | |||||||
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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.
The provision for credit losses was $19.0 thousand and $881.7 thousand for continued operations for the three months ended March 31, 2024 and 2023, respectively.
NOTE 8. CONCENTRATIONS OF RISK AND SIGNIFICANT CUSTOMERS
The Company has concentrated credit risk for cash by maintaining deposits in one bank. These balances are insured by the Federal Deposit Insurance Corporation up to $250,000. From time to time during the quarter ended March 31, 2024 and year ended December 31, 2023, the Company’s cash balances exceeded the federally insured limits. No losses have been incurred relating to this concentration.
At March 31, 2024 and 2023 and for each of the three months then ended, the Company’s revenues and receivables were comprised of the following customer concentrations:
| As of and for the Three Months Ended | |||||||||||||||||||||||
| March 31, 2024 | March 31, 2023 | ||||||||||||||||||||||
| % of Revenues | % of Receivables | % of Revenues | % of Receivables | ||||||||||||||||||||
| Customer 1 | 35% | 2% | 38% | 23% | |||||||||||||||||||
| Customer 2 | 30% | 4% | 37% | 1% | |||||||||||||||||||
| Customer 3 | 10% | 22% | —% | —% | |||||||||||||||||||
For each of the three months ended March 31, 2024 and 2023, the Company’s segment revenues were comprised of the following customer concentrations:
| % of Revenue by Segment | % Revenue by Segment | ||||||||||||||||||||||||||||
| March 31, 2024 | March 31, 2023 | ||||||||||||||||||||||||||||
| Refining | Black Oil and Recovery | Refining | Black Oil and Recovery | ||||||||||||||||||||||||||
| Customer 1 | 37% | —% | 39% | —% | |||||||||||||||||||||||||
| Customer 2 | 31% | —% | 39% | —% | |||||||||||||||||||||||||
| Customer 3 | 11% | —% | —% | —% | |||||||||||||||||||||||||
For each of the three months ended March 31, 2024 and 2023, substantially all of the Company's crude oil, which is used in our Refining and Marketing segment, is purchased from a single vendor.
The Company’s revenue, profitability and future rate of growth are substantially dependent on prevailing prices for petroleum-based products. Historically, the energy markets have been very volatile, and there can be no assurance that these prices will not be subject to wide fluctuations in the future. A substantial or extended decline in such prices could have a material adverse effect on the Company’s financial position, results of operations, cash flows, and access to capital and on the quantities of petroleum-based products that the Company can economically produce.
NOTE 9. INVENTORY
The following table describes the Company's inventory balances by category (in thousands):
| As of March 31, 2024 | As of December 31, 2023 | ||||||||||
| Crude oil | $ | 72,966 | $ | 60,702 | |||||||
| Renewable feedstocks | 24,920 | 27,450 | |||||||||
| Refined products | 98,699 | 91,911 | |||||||||
| Re-refined products | 2,394 | 2,057 | |||||||||
| Total hydrocarbon inventories | $ | 198,979 | $ | 182,120 | |||||||
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NOTE 10. INVENTORY FINANCING AGREEMENTS
The following table summarizes our outstanding obligations under our inventory financing agreements (in thousands):
March 31, 2024 | December 31, 2023 | |||||||||||||
| Obligations under inventory financing agreements | $ | 169,656 | $ | 141,343 | ||||||||||
| Unamortized financing cost | — | (250) | ||||||||||||
| Obligations under inventory financing agreements, net | $ | 169,656 | $ | 141,093 | ||||||||||
The valuation of our obligations at the end of each reporting period requires that we make estimates of the prices and differentials for our then monthly forward purchase obligations.
Supply and Offtake Agreement
On April 1, 2022 (the “Commencement Date”), Vertex Refining Alabama, LLC (“Vertex Refining”), and the Company, entered into a Supply and Offtake Agreement (the “Supply and Offtake Agreement”) with Macquarie Energy North American Trading Inc (“Macquarie”), pertaining to crude oil supply and offtake of finished products located at the Mobile Refinery acquired on April 1, 2022.
Under the Supply and Offtake Agreement, Macquarie purchases the majority of the crude oil utilized at the Mobile Refinery and holds legal title prior to its sale to Vertex Refining for consumption within the Mobile Refinery processing units. Also pursuant to the Supply and Offtake Agreement, Macquarie purchases from Vertex Refining substantially all of the Mobile Refinery’s output of certain refined products and owns 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. 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 any unsold inventory.
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 Supply and Offtake Agreement expires March 31, 2024, subject to the performance of customary covenants, and certain events of default and termination events provided therein, for a facility of that size and type. The agreement automatically extends for another 12 months after the end of the initial term, unless terminated prior to such date by either party with 180 days prior written notice. Neither party exercised the termination clause.
Amendment No. 1 to Supply and Offtake Agreement
On May 26. 2023, in connection with the entry into the RD Supply and Offtake Agreement, discussed below, Macquarie, Vertex Refining and the Company, entered into Amendment Agreement No. 1 to the Supply and Offtake Agreement (“Amendment 1”). Pursuant to Amendment 1, the Supply and Offtake Agreement was amended to include certain additional documents relating to the RD Supply and Offtake Agreement as transaction documents, and to update such Supply and Offtake Agreement in connection therewith, to amend the unwind procedures associated with the Supply and Offtake Agreement, and to update or revise certain other covenants set forth in the Supply and Offtake Agreement relating to cross defaults, finance agreements, minimum liquidity, and guarantor requirements, to be conformed with changes made to analogous provisions in, or to otherwise account for, the RD Supply and Offtake Agreement terms. Amendment 1 also made conforming amendments to certain other agreements relating to the Supply and Offtake Agreement.
Renewables RD Supply and Offtake Agreement
On May 26, 2023 (the “Commencement Date”), Vertex Renewables Alabama, LLC, an affiliate indirectly wholly-owned by the Company (“Vertex Renewables”), entered into a Supply and Offtake Agreement (the “RD Supply and Offtake Agreement”, and
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together with the Supply and Offtake Agreement, the “Supply and Offtake Agreements”) with Macquarie, pertaining to the supply and financing of renewable biomass feedstocks used for the production of renewable fuels, the offtake and financing of renewable diesel, and the provision of certain financing accommodations with respect to certain agreed environmental attributes associated with the operation of such renewable diesel unit (including Renewable Identification Numbers (RINs), tax credits, and low carbon fuel credits) at the Mobile Refinery.
The RD Supply and Offtake Agreement has a 24 month term following the Effective Date, which was May 26, 2023, subject to the performance of customary covenants, and may be terminated earlier following the occurrence of certain events of default and termination events provided therein that are customary for a facility of this size and type and subject to applicable cure periods in certain events. Additionally, either party may terminate the agreement at any time, for any reason, with not less than 180 days prior notice to the other. In the event Vertex Renewables is the terminating party, Vertex Refining must also at the same time, terminate that certain Supply and Offtake Agreement entered into with Macquarie dated April 1, 2022.
Pursuant to the Supply and Offtake Agreement, we pay or receive certain fees from Macquarie based on changes in market prices over time. The following table summarizes the inventory intermediation fees, interest expenses and financing costs (in thousands):
| Three Months Ended March 31, | ||||||||||||||
| 2024 | 2023 | |||||||||||||
| Intermediation fees (include over/under) | $ | (41) | $ | 2,064 | ||||||||||
| Inventory financing fees | $ | 2,063 | $ | 2,295 | ||||||||||
| Interest expense and financing costs, net | $ | 2,959 | $ | 2,520 | ||||||||||
The intermediation fees are included in the cost of revenues on the consolidated statement of operations for three months ended March 31, 2024 and 2023.
NOTE 11. PREPAID EXPENSES AND OTHER CURRENT ASSETS
The following table describes the Company's prepaid expenses and other current assets balances (in thousands):
| As of March 31, 2024 | As of December 31, 2023 | ||||||||||
| Prepaid insurance | $ | 1,950 | $ | 8,076 | |||||||
| Commodity derivative advance | 1,724 | 1,502 | |||||||||
| Sulfur credits | 603 | 3,462 | |||||||||
| Prepaid feedstock | 1,831 | 9,845 | |||||||||
| Prepaid freight | 3,243 | 3,260 | |||||||||
| Prepaid operating expenses | 3,429 | 4,756 | |||||||||
| Inventory financing deposit | 18,618 | 15,259 | |||||||||
| Derivative commodity assets | — | 11 | |||||||||
| Other current assets | 7,275 | 7,003 | |||||||||
| Total prepaid expenses & other current assets | $ | 38,673 | $ | 53,174 | |||||||
NOTE 12. FIXED ASSETS, NET
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Fixed assets consist of the following (in thousands):
| Useful Life (in years) | March 31, 2024 | December 31, 2023 | |||||||||||||||
| Equipment | 7 - 20 | $ | 287,067 | $ | 276,331 | ||||||||||||
| Leasehold improvements | 15 | 2,877 | 2,852 | ||||||||||||||
| Office equipment & furniture | 5 - 7 | 1,446 | 1,446 | ||||||||||||||
| Vehicles | 5 | 15,796 | 15,087 | ||||||||||||||
| Building | 20 | 3,912 | 3,663 | ||||||||||||||
| Turnarounds | 4 | 19,388 | 21,100 | ||||||||||||||
| Construction in progress | 55,043 | 53,467 | |||||||||||||||
| Land | 9,120 | 9,439 | |||||||||||||||
| Land improvement | 15 | 972 | 354 | ||||||||||||||
| Total fixed assets | 395,621 | 383,739 | |||||||||||||||
| Less accumulated depreciation | (62,672) | (57,628) | |||||||||||||||
| Net fixed assets | $ | 332,949 | $ | 326,111 | |||||||||||||
The increase in fixed assets is due to the investment in the conventional refinery project at the Mobile Refinery, which began April 1, 2022, and which includes construction in progress. Depreciation expense was $7.2 million and $3.6 million for the three months ended March 31, 2024 and 2023, respectively, for the continued operations. In addition, we sold a portion of land at the Mobile Refinery for $2.6 million for purposes of building a rail road spur at the facility site.
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 13. INTANGIBLE ASSETS, NET
Components of intangible assets (subject to amortization) consist of the following items (in thousands):
| March 31, 2024 | December 31, 2023 | |||||||||||||||||||||||||||||||||||||||||||
| Useful Life (in years) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||||||||||||||||||||||
| Customer relations | 5 | $ | 1,658 | $ | 1,023 | $ | 635 | $ | 1,658 | $ | 989 | $ | 669 | |||||||||||||||||||||||||||||||
| Vendor relations | 10 | 4,778 | 4,657 | 121 | 4,778 | 4,639 | 139 | |||||||||||||||||||||||||||||||||||||
| Trademark/Trade name | 15 | 887 | 669 | 218 | 887 | 657 | 230 | |||||||||||||||||||||||||||||||||||||
| Technology/Patent | 15 - 30 | 15,787 | 10,021 | 5,766 | 15,787 | 9,780 | 6,007 | |||||||||||||||||||||||||||||||||||||
| Software and cloud | 3 | 10,419 | 6,370 | 4,049 | 10,067 | 5,571 | 4,496 | |||||||||||||||||||||||||||||||||||||
| $ | 33,529 | $ | 22,740 | $ | 10,789 | $ | 33,177 | $ | 21,636 | $ | 11,541 | |||||||||||||||||||||||||||||||||
Intangible assets are amortized on a straight-line basis. We continually evaluate the amortization period and carrying basis of intangible assets to determine whether subsequent events and circumstances warrant a revised estimated useful life or reduction in value.
Total amortization expense of intangibles was $1.1 million and $1.0 million for the three months ended March 31, 2024 and 2023, respectively.
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Estimated future amortization expense is as follows (in thousands):
| March 31, | Balance | |||||||
| 2025 | $ | 4,458 | ||||||
| 2026 | 1,412 | |||||||
| 2027 | 1,383 | |||||||
| 2028 | 1,006 | |||||||
| 2029 | 510 | |||||||
| Thereafter | 2,020 | |||||||
| $ | 10,789 | |||||||
NOTE 14. ACCRUED LIABILITIES
Accrued expenses and other current liabilities consisted of the following (in thousands):
| March 31, 2024 | December 31, 2023 | |||||||||||||
| Accrued purchases | $ | 10,020 | 17,685 | |||||||||||
| Accrued interest | 321 | 460 | ||||||||||||
| Accrued compensation and benefits | 6,206 | 7,605 | ||||||||||||
| Accrued taxes other than payroll taxes | 2,223 | 826 | ||||||||||||
| RINS obligations | 44,395 | 46,153 | ||||||||||||
| Benzene credits obligations | 311 | 531 | ||||||||||||
| Unearned revenue | 5,278 | 325 | ||||||||||||
| Environmental liabilities - current | 51 | 51 | ||||||||||||
| Derivative commodity liability | 435 | — | ||||||||||||
| $ | 69,240 | $ | 73,636 | |||||||||||
NOTE 15. FINANCING AGREEMENTS
The Company's long-term debt consisted of the following as of March 31, 2024 and December 31, 2023 (in thousands):
| Creditor | Loan Type | Balance at March 31, 2024 | Balance at December 31, 2023 | ||||||||||||||
| Senior Convertible Note | Convertible note | $ | 15,230 | $ | 15,230 | ||||||||||||
| Term Loan 2025 | Loan | 195,950 | 195,950 | ||||||||||||||
| Citizens National Bank - Promissory Note | Loan | 2,611 | — | ||||||||||||||
| Various institutions | Short-term note | 2,399 | 6,237 | ||||||||||||||
| Principal amount of long-term debt | 216,190 | 217,417 | |||||||||||||||
| Less: unamortized discount and deferred financing costs | (25,894) | (30,354) | |||||||||||||||
| Total debt, net of unamortized discount and deferred financing costs | 190,296 | 187,063 | |||||||||||||||
| Less: current maturities, net of unamortized discount and deferred financing costs | (12,524) | (16,362) | |||||||||||||||
| Long-term debt, net of current maturities | $ | 177,772 | $ | 170,701 | |||||||||||||
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Future maturities of long-term debt, excluding financing lease obligations, as of March 31, 2024 are summarized as follows (in thousands):
| Period Ended March 31, | Amount Due | |||||||
| 2025 | $ | 12,524 | ||||||
| 2026 | 185,825 | |||||||
| 2027 | — | |||||||
| 2028 | 15,230 | |||||||
| 2029 | 2,611 | |||||||
| Total | $ | 216,190 | ||||||
Short-Term Loan
The Company financed insurance premiums through various financial institutions bearing interest at rates ranging from 3.24% to 6.25% per annum. All such premium finance agreements have maturities of less than one year and have a balance of $1.4 million at March 31, 2024 and $4.9 million at December 31, 2023.
The Company has a short-term promissory note for the purchase of assets bearing 8.5% interest per annum, with an outstanding balance of $1.0 million at March 31, 2024 and $1.3 million at December 31, 2023.
Promissory Note
The Company has a long-term promissory note for the purchase of assets with an outstanding balance of $2.6 million bearing 7.83% interest rate per annum at March 31, 2024.
Term Loan
Vertex Refining, the Company, as a guarantor, substantially all of the Company’s direct and indirect subsidiaries, as guarantors, certain funds as lenders (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 on April 1, 2022 (as amended from time to time, the “Loan and Security Agreement”).
On September 30, 2022, the parties entered into a second amendment to the Loan and Security Agreement which (a) extended the date that the Company was required to begin initial commercial production of renewable diesel at the Mobile Refinery, from February 28, 2023 to April 28, 2023 (which date the Lenders subsequently further agreed to extend until July 14, 2023), and provided other corresponding extensions of the milestones required to complete the Company’s capital project designed to modify the Mobile Refinery’s existing hydrocracking unit to produce renewable diesel fuel on a standalone basis, which mechanical completion was achieved in March 2023; and (b) waived and extended certain deadlines and time periods for the Company to take other actions in connection with the Loan and Security Agreement.
On December 28, 2023, the parties entered into a fifth amendment to the Loan and Security Agreement (a) pursuant to which certain of the Lenders (the “Additional Lenders”) agreed to provide an additional term loan in the amount of $50 million (the “Additional Term Loan”, and together with the existing term loans, the “Term Loan”); and (b) the Lenders waived certain technical events of default which had occurred under the Loan and Security Agreement, mainly relating to monetary thresholds for indebtedness and investments; and to include certain other mutually negotiated changes to the Loan and Security Agreement.
Amounts outstanding under the existing Term Loan mature at April 1, 2025, and 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) 10.25%, currently 17.25%. Interest 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 March 28, 2024, (ii) in connection with any payment, prepayment or repayment of the Term Loans, and (iii) at maturity (whether upon demand, by acceleration or otherwise). Pursuant to the Loan and Security Agreement, on the last day of March, June, September and December of each year (or if such day is not a business day, the next succeeding business day), beginning on June 28, 2024 and ending on December 31, 2024, Vertex Refining Alabama LLC (“Vertex Refining”) is required to repay
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$2,687,500 of the principal amount of the Term Loans, subject to reductions in the event of any prepayment of the Loan and Security Agreement.
Pursuant to the Loan and Security Agreement, the Lenders agreed to provide a $215.0 million term loan to Vertex Refining (the “Term Loan”).
On March 22, 2024, the Lenders entered into a limited consent with all of the parties to the Term Loan, and consented to the Company selling certain real property (land) located at the Mobile Refinery for $4.1 million to build out a rail spur at the refinery site. The payment of $1.5 million of this total amount is contingent upon the completion of the Company's infrastructure such that the railroad can access the Mobile Refinery.
On March 28, 2024, the Lenders entered into a limited consent with all of the parties to the Term Loan, and consented to the Company postponing the mandatory prepayment of an aggregated principal amount of $2.1 million and interest of $9.4 million related to the Term Loan, which would have otherwise been due on the last business day of the calendar quarter ending March 31, 2024, until April 15, 2024, which payment was made on such date.
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 with an exercise price of $4.50 per share, to the Lenders (and/or their affiliates) on April 1, 2022 (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 Amendment No. One to Loan and Security 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 0.25 million shares of the Company’s common stock with an exercise price of $9.25 per share, 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 “Prior Warrant Agreements”) entered into on May 26, 2022, between the Company and Continental Stock Transfer & Trust Company as warrant agent.
In connection with the entry into Amendment No. Five to Loan and Security Agreement, and as a required term and condition thereof, on December 28, 2023, the Company granted warrants (the “New Warrants”) to purchase 1.0 million shares of the Company’s common stock with an exercise price of $3.00 per share, to certain lenders and their affiliates. As additional consideration for the Lenders agreeing to Amendment No. Five to Loan Agreement, the Company agreed to reprice the Prior Warrants to have an exercise price of $3.00 per share (the “Warrant Repricing”).
Each Warrant holder has a put right to require the Company to repurchase any portion of the Warrants held by such holder concurrently with the consummation of a fundamental transaction, as detailed in the applicable Warrant Agreement. The fundamental transaction clause requires the Warrants to be classified as liabilities. The fair value of the Warrants is presented in “Note 19. Fair Value Measurements”, and warrant activities are presented in “Note 17. Equity”.
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 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, 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.
During the year ended December 31, 2022, holders of an aggregate of $60 million of the Convertible Senior Notes due 2027, converted such notes into 10.2 million shares of common stock of the Company pursuant to the terms of the Indenture. Upon the conversion, the Company recognized $33.9 million of unamortized deferred loan cost and discount as interest expense.
On June 12, 2023, pursuant to the terms of certain separate, privately negotiated exchange agreements, the holders of $79.9 million principal amount of the Convertible Senior Notes due 2027, exchanged such principal amount of notes for an aggregate of 17.2 million newly issued shares of common stock. The Company also paid an aggregate of $1.0 million in cash to satisfy accrued and unpaid interest on the converted notes through the closing date of the exchanges. Upon the exchange, the
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Company recognized $40.7 million unamortized deferred loan cost and discount and $21.2 million in inducement cost as interest expense.
The components of the Convertible Senior Notes are presented as follows (in thousands):
| March 31, 2024 | December 31, 2023 | |||||||||||||
| Principal amounts at beginning of period | $ | 15,230 | $ | 95,178 | ||||||||||
| Conversion of principal into common stock | — | (79,948) | ||||||||||||
| Outstanding principal amount | 15,230 | 15,230 | ||||||||||||
| Unamortized discount and issuance costs | (6,865) | (7,157) | ||||||||||||
| Net carrying amount at end of period | $ | 8,365 | $ | 8,073 | ||||||||||
Our Convertible Senior Notes will mature on October 1, 2027, unless earlier repurchased, redeemed or converted. Interest is payable semiannually in arrears on April 1 and October 1 of each year, beginning on April 1, 2022.
NOTE 16. LEASES
Finance Leases
The Company's finance lease liabilities consisted of the following as of March 31, 2024 and December 31, 2023 (in thousands):
| Creditor | Loan Type | March 31, 2024 | December 31, 2023 | ||||||||||||||
| Matheson Tri-Gas | Finance Lease | $ | 43,816 | $ | 44,132 | ||||||||||||
| Plaquemines | Finance Lease | 940 | 994 | ||||||||||||||
| Harvey Ford | Finance Lease | 36 | 39 | ||||||||||||||
| DLL financial | Finance Lease | 45 | 47 | ||||||||||||||
| Diego | Finance Lease | 139 | 137 | ||||||||||||||
| Xerox | Finance Lease | 16 | — | ||||||||||||||
| Centerpoint Blakely | Finance Lease | 23,081 | 23,292 | ||||||||||||||
| $ | 68,073 | $ | 68,641 | ||||||||||||||
Future maturities of finance lease obligations, as of March 31, 2024, are summarized as follows (in thousands):
| Period Ended March 31, | Amount Due | |||||||
| 2025 | $ | 8,459 | ||||||
| 2026 | 8,462 | |||||||
| 2027 | 8,455 | |||||||
| 2028 | 27,847 | |||||||
| 2029 | 6,588 | |||||||
| Thereafter | 56,240 | |||||||
| Total lease payments | 116,051 | |||||||
| Less: interest | (47,978) | |||||||
| Present value of financing lease liabilities | 68,073 | |||||||
| Less: current portion of lease liabilities | (2,497) | |||||||
| Total lease liabilities, net of current portion | $ | 65,576 | ||||||
The following table summarizes the lease cost recognized in our consolidated statements of operations (in thousands):
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| Three Months Ended March 31, | ||||||||||||||
| Lease Cost Type | 2024 | 2023 | ||||||||||||
| Amortization of finance lease ROU assets | $ | 993 | $ | 784 | ||||||||||
| Interest on lease liabilities | 1,522 | 1,382 | ||||||||||||
| Net finance lease costs | $ | 2,515 | $ | 2,166 | ||||||||||
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.
The following table summarizes the operating lease costs recognized (in thousands):
| Three Months Ended March 31, | ||||||||||||||
| Lease Cost Type | 2024 | 2023 | ||||||||||||
| Operating lease cost | $ | 7,499 | $ | 3,070 | ||||||||||
| Variable lease cost | 659 | 260 | ||||||||||||
| Short-term lease cost | 6,651 | 1,929 | ||||||||||||
| Net lease cost | $ | 14,809 | $ | 5,259 | ||||||||||
Cash Flows
The following table summarizes the supplemental cash flow information related to leases as follows (in thousands):
| Three Months Ended March 31, | ||||||||||||||
| Lease Cost Type | 2024 | 2023 | ||||||||||||
| Cash paid for amounts included in the measurement of liabilities | ||||||||||||||
| Payments on financing lease | $ | 586 | $ | 310 | ||||||||||
| Payments on operating lease | $ | 7,499 | $ | 3,070 | ||||||||||
| Non-cash supplemental amounts | ||||||||||||||
| ROU assets obtained from new finance lease liabilities | $ | 18 | $ | 15,024 | ||||||||||
| ROU assets obtained from new operating lease liabilities | $ | 74 | $ | 15,078 | ||||||||||
| ROU assets terminated from release of operating lease liabilities | $ | (17,666) | $ | — | ||||||||||
Maturities of our lease liabilities for all operating leases are as follows as of March 31, 2024 (in thousands):
| For the period ending March 31, | Facilities | Equipment | Plant | Railcar | Total | ||||||||||||||||||||||||
| 2025 | $ | 975 | $ | 12,300 | $ | 8,009 | $ | 687 | $ | 21,971 | |||||||||||||||||||
| 2026 | 818 | 6,512 | 7,721 | 567 | 15,618 | ||||||||||||||||||||||||
| 2027 | 631 | 5,058 | 7,745 | 246 | 13,680 | ||||||||||||||||||||||||
| 2028 | 606 | 3,438 | 7,603 | 104 | 11,751 | ||||||||||||||||||||||||
| 2029 | 545 | — | 6,946 | — | 7,491 | ||||||||||||||||||||||||
| Thereafter | 1,293 | — | 72,072 | — | 73,365 | ||||||||||||||||||||||||
| Total lease payments | 4,868 | 27,308 | 110,096 | 1,604 | 143,876 | ||||||||||||||||||||||||
| Less: interest | (1,391) | (4,269) | (60,455) | (135) | (66,250) | ||||||||||||||||||||||||
| Present value of operating lease liabilities | 3,477 | 23,039 | 49,641 | 1,469 | 77,626 | ||||||||||||||||||||||||
| Less: current portion of lease liabilities | (621) | (10,076) | (2,025) | (559) | (13,281) | ||||||||||||||||||||||||
| Total lease liabilities, net of current portion | $ | 2,856 | $ | 12,963 | $ | 47,616 | $ | 910 | $ | 64,345 | |||||||||||||||||||
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The weighted average remaining lease terms and discount rates for all of our financing lease and operating leases were as follows as of March 31, 2024:
| Remaining lease term and discount rate: | March 31, 2024 | |||||||||||||
| Operating lease | Financing lease | |||||||||||||
| Weighted average remaining lease terms (years) | ||||||||||||||
| Lease facilities | 4.94 | — | ||||||||||||
| Lease equipment | 1.90 | 3.87 | ||||||||||||
| Lease plant | 13.55 | 14.16 | ||||||||||||
| Lease railcar | 2.21 | — | ||||||||||||
| Weighted average discount rate | ||||||||||||||
| Lease facilities | 11.07 | % | — | % | ||||||||||
| Lease equipment | 12.11 | % | 9.19 | % | ||||||||||
| Lease plant | 12.31 | % | 8.89 | % | ||||||||||
| Lease railcar | 10.72 | % | — | % | ||||||||||
Significant Judgments
Significant judgments include the discount rates applied, the expected lease terms, lease renewal options and residual value guarantees. There are several leases with renewal options or purchase options.
The purchase options are not expected to have a material impact on the lease obligation. There are several facility and plant leases which have lease renewal options ranging from to five years for each renewal period. 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.
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NOTE 17. EQUITY
Common Stock
The total number of authorized shares of the Company’s common stock is 750 million shares, $0.001 par value per share. As of March 31, 2024 and December 31, 2023, there were 93,514,346 and 93,514,346, respectively, shares of common stock issued and outstanding.
Each share of the Company's common stock is entitled to equal dividends and distributions per share with respect to the common stock when, as and if declared by the Company's board of directors. No holder of any shares of the Company's common stock has a preemptive right to subscribe for any of the Company's securities, nor are any shares of the Company's common stock subject to redemption or convertible into other securities. Upon liquidation, dissolution or winding-up of the Company and after payment of creditors and preferred shareholders of the Company, if any, the assets of the Company will be divided pro rata on a share-for-share basis among the holders of the Company's common stock. Each share of the Company's common stock is entitled to one vote. Shares of the Company's common stock do not possess any cumulative voting rights.
During the three months ended March 31, 2023, the Company issued 166,000 shares of common stock in connection with the exercise of options.
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NOTE 18. EARNINGS PER SHARE
The following is a reconciliation of the numerator and denominator for basic and diluted income (loss) per share for the three months ended March 31, 2024 and 2023 (in thousands, except per share amounts):
| Three Months Ended March 31, | ||||||||||||||
| 2024 | 2023 | |||||||||||||
| Basic income (loss) per Share | ||||||||||||||
| Numerator: | ||||||||||||||
| Net income (loss) attributable to shareholders from continuing operations | $ | (17,734) | $ | 3,523 | ||||||||||
| Net income attributable to shareholders from discontinued operations, net of tax | — | 50,340 | ||||||||||||
| Net income (loss) attributable to common shareholders | $ | (17,734) | $ | 53,863 | ||||||||||
| Denominator: | ||||||||||||||
| Weighted-average common shares outstanding | 93,514 | 75,689 | ||||||||||||
| Basic income (loss) per common shares | ||||||||||||||
| Continuing operations | $ | (0.19) | $ | 0.05 | ||||||||||
| Discontinued operations, net of tax | — | 0.66 | ||||||||||||
| Basic income (loss) per share | $ | (0.19) | $ | 0.71 | ||||||||||
| Diluted Income (Loss) per Share | ||||||||||||||
| Numerator: | ||||||||||||||
| Net income (loss) attributable to shareholders from continuing operations | $ | (17,734) | $ | 3,523 | ||||||||||
| Net income available to shareholders from discontinued operations, net of tax | — | 50,340 | ||||||||||||
| Net income (loss) available to common shareholders | $ | (17,734) | $ | 53,863 | ||||||||||
| Denominator: | ||||||||||||||
| Weighted-average shares outstanding | 93,514 | 75,689 | ||||||||||||
| Effect of dilutive securities* | ||||||||||||||
| Stock options and warrants | — | 3,307 | ||||||||||||
| Diluted weighted-average shares outstanding | 93,514 | 78,996 | ||||||||||||
| Diluted income (loss) per common shares | ||||||||||||||
| Continuing operations | $ | (0.19) | $ | 0.04 | ||||||||||
| Discontinued operations, net of tax | — | 0.64 | ||||||||||||
| Diluted income (loss) per share | $ | (0.19) | $ | 0.68 | ||||||||||
*Excludes 4.1 million shares of common stock for the three months ended March 31, 2024, of which 3.8 million shares may be issued upon exercise of warrants and 0.3 million shares may be issued upon exercise of options. Also, excludes 3.6 million and 22.2 million shares of common stock for the three months ended March 31, 2024 and 2023, respectively, 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 Convertible Senior Notes. These were excluded due to their anti-dilutive effect.
NOTE 19. FAIR VALUE MEASUREMENTS
The following tables present assets and liabilities accounted for at fair value on a recurring basis as of March 31, 2024 and December 31, 2023 (in thousands):
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| As of March 31, 2024 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Assets at fair value | |||||||||||||||||||||||
| Environmental credits | $ | — | $ | 603 | $ | — | $ | 603 | |||||||||||||||
| Total assets at fair value | — | 603 | — | 603 | |||||||||||||||||||
| Liabilities at fair value | |||||||||||||||||||||||
| Commodity | — | (435) | — | (435) | |||||||||||||||||||
| RINS and environmental credits | — | (44,706) | — | (44,706) | |||||||||||||||||||
| Derivative warrants | — | — | (3,249) | (3,249) | |||||||||||||||||||
| Total liabilities at fair value | — | (45,141) | (3,249) | (48,390) | |||||||||||||||||||
| Total | $ | — | $ | (44,538) | $ | (3,249) | $ | (47,787) | |||||||||||||||
| As of December 31, 2023 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Assets at fair value | |||||||||||||||||||||||
| Commodity | $ | — | $ | 11 | $ | — | $ | 11 | |||||||||||||||
| Total assets at fair value | — | 11 | — | 11 | |||||||||||||||||||
| Liabilities at fair value | |||||||||||||||||||||||
| RINS and environmental credits | — | (46,684) | — | (46,684) | |||||||||||||||||||
| Derivative warrants | — | — | (9,907) | (9,907) | |||||||||||||||||||
| Total liabilities at fair value | — | (46,684) | (9,907) | (56,591) | |||||||||||||||||||
| Total | $ | — | $ | (46,673) | $ | (9,907) | $ | (56,580) | |||||||||||||||
Level 3 instruments include the Initial Warrants and Additional Warrants granted in connection with the Loan and Security Agreement, see Note 15 "Financing Agreements". We revalued the 3,835 thousand warrants granted and outstanding at March 31, 2024 using the Dynamic Black-Scholes model that computes the impact of a possible change in control transaction upon the exercise of the warrant shares. The Dynamic Black-Scholes Merton unobservable inputs used were as follows:
| Dynamic Black-Scholes Merton Unobservable Inputs | ||||||||||||||||||||
| Initial Warrants | Additional Warrants | New Warrants | ||||||||||||||||||
| Expected dividend rate | — | % | — | % | — | % | ||||||||||||||
| Expected volatility | 113.23 | % | 115.74 | % | 109.89 | % | ||||||||||||||
| Risk free interest rate | 4.40 | % | 4.31 | % | 4.21 | % | ||||||||||||||
| Expected term | 3.01 | 3.67 | 4.76 | |||||||||||||||||
The following is an analysis of changes in the derivative liability classified as level 3 in the fair value hierarchy as of March 31, 2024 and December 31, 2023 (in thousands):
| Level Three Roll-Forward | ||||||||||||||
| March 31, 2024 | December 31, 2023 | |||||||||||||
| Balance at beginning of period | $ | 9,907 | $ | 14,270 | ||||||||||
| New warrants granted | — | 2,905 | ||||||||||||
| Repricing warrants granted | — | 724 | ||||||||||||
| Change in valuation of warrants included in net income | (6,658) | (7,992) | ||||||||||||
| Balance at end of period | $ | 3,249 | $ | 9,907 | ||||||||||
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See Note 20 "Commodity Derivative Instruments", below for information on the impact on results of operations of our commodity derivative instruments.
NOTE 20. COMMODITY DERIVATIVE INSTRUMENTS
The Company utilizes derivative instruments to manage its exposure to fluctuations in the underlying commodity prices of its inventory. The Company’s management sets and implements hedging policies, including volumes, types of instruments and counterparties, to support oil prices at targeted levels and manage its exposure to fluctuating prices.
The Company’s derivative instruments consist of option and futures arrangements for oil. For option and futures arrangements, the Company receives the difference positive or negative between an agreed-upon strike price and the market price.
The mark-to-market effects of these contracts as of March 31, 2024 and December 31, 2023, are summarized in the following table. The notional amount is equal to the total net volumetric derivative position during the period indicated. The fair value of the crude oil futures agreements is based on the difference between the strike price and the New York Mercantile Exchange and Brent Complex futures price for the applicable trading months.
| As of March 31, 2024 | ||||||||||||||
| Contract Type | Contract Period | Weighted Average Strike Price (Barrels) | Remaining Volume (Barrels) | Fair Value | ||||||||||
| (in thousands) | (in thousands) | |||||||||||||
| Futures | Mar. 2024-May. 2024 | $ | 110.37 | 38 | $ | (8) | ||||||||
| Futures | Mar. 2024-Jun. 2024 | $ | 86.00 | 124 | $ | (124) | ||||||||
| Futures | Mar. 2024-May. 2024 | $ | 46.10 | 273 | $ | (303) | ||||||||
| As of December 31, 2023 | ||||||||||||||
| Contract Type | Contract Period | Weighted Average Strike Price (Barrels) | Remaining Volume (Barrels) | Fair Value | ||||||||||
| (in thousands) | (in thousands) | |||||||||||||
| Futures | Dec. 2023 - Feb. 2024 | $ | 108.18 | 1 | $ | 20 | ||||||||
| Futures | Dec. 2023 - Feb. 2024 | $ | 110.33 | 4 | $ | (156) | ||||||||
| Futures | Dec. 2023 - May. 2024 | $ | 77.94 | 7 | $ | (63) | ||||||||
| Futures | Dec. 2023 - May. 2024 | $ | 49.94 | 60 | $ | 632 | ||||||||
| Swap | Dec. 2023 - Jan. 2024 | $ | 88.39 | 164 | $ | (372) | ||||||||
| Swap | Dec. 2023 - Jan. 2024 | $ | 25.55 | 100 | $ | (50) | ||||||||
The carrying values of the Company’s derivatives positions and their locations on the consolidated balance sheets as of March 31, 2024 and December 31, 2023 are presented in the table below (in thousands):
| Balance Sheet Classification | Contract Type | March 31, 2024 | December 31, 2023 | |||||||||||||||||
| Soybean oil future | $ | (303) | $ | 632 | ||||||||||||||||
| Crude oil swaps | — | (422) | ||||||||||||||||||
| Crude oil futures | (132) | (199) | ||||||||||||||||||
| Derivative commodity asset(liability) | $ | (435) | $ | 11 | ||||||||||||||||
For the three months ended March 31, 2024 and 2023, we recognized a loss of $1.3 million and a gain of $1.5 million, respectively, on commodity derivative contracts on the consolidated statements of operations as part of our cost of revenues.
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NOTE 21. INCOME TAXES
At the end of each interim period, the Company estimates the effective tax rate expected to be applicable for the full fiscal year and this rate is applied to the results for the year-to date period, and then adjusted for any discrete period items.
For the three month period ended March 31, 2024, the Company calculated an annual effective tax rate of 0% on pre-tax book loss of $17.9 million and booked total tax expenses of $0.
For the three month period ended March 31, 2023, the Company calculated an annual effective tax rate of 26% on pre-tax income of $4.5 million and recognized income tax expense of $1.0 million on continued operations.
The Company also recognized income tax expense of $17.7 million on discontinued operations for the three months ended March 31, 2023, refer to “Note 22. Discontinued Operations” for more information.
For the three-month period ended March 31, 2024, the variance between the Company’s effective tax rate and the U.S. statutory rate of 21% is primarily attributable to the change in valuation allowance, non-deductible expenses and income attributable to non-controlling interest. The tax expense for the three month ended March 31, 2023, was primarily related to discrete items.
NOTE 22. DISCONTINUED OPERATIONS
During the third quarter of 2021, the Company initiated and began executing a strategic plan to sell its used motors oils business (“UMO Business”). An investment banking advisory services firm was engaged and actively marketed this segment.
On February 1, 2023, the Company sold all of its equity interests in Vertex OH, which owned our Heartland refinery located in Columbus, Ohio (the “Heartland Refinery”) for $87.2 million net cash settlement. The sale also included all property and assets owned by Vertex OH, including inventory associated with the Heartland Refinery, and all real and leased property and permits owned by Vertex OH, and all used motor oil collection and recycling assets and operations owned by Vertex OH.
For the three months ended March 31, 2023, the Company presented the Heartland Operations as discontinued operations.
The following summarized financial information has been segregated from continuing operations and reported as Discontinued Operations for the three months ended March 31, 2023 (in thousands):
| Three Months Ended March 31, | ||||||||
| 2023 | ||||||||
| Revenues | $ | 7,366 | ||||||
| Cost of revenues (exclusive of depreciation shown separately below) | 4,589 | |||||||
| Depreciation and amortization attributable to costs of revenues | 124 | |||||||
| Gross profit | 2,653 | |||||||
| Operating expenses: | ||||||||
| Selling, general and administrative expenses (exclusive of depreciation shown separately below) | 632 | |||||||
| Depreciation and amortization expense attributable to operating expenses | 21 | |||||||
| Total operating expenses | 653 | |||||||
| Income before income tax | 2,000 | |||||||
| Income tax expense | (528) | |||||||
Gain on sale of discontinued operations, net of $17,218 of tax | 48,868 | |||||||
| Income from discontinued operations, net of tax | $ | 50,340 | ||||||
NOTE 23. RELATED PARTY TRANSACTIONS
Related Parties
From time to time, the Company consults Ruddy Gregory, PLLC., a related party law firm of which James Gregory, a former member of the Board of Directors, and the General Counsel and Secretary of the Company as of December 31, 2023, serves as a partner. During the three months ended March 31, 2024 and 2023, we paid $172 thousand and $185 thousand to such law firm for legal services rendered.
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NOTE 24. SUBSEQUENT EVENTS
On April 1, 2024, on the approval and recommendation of the Compensation Committee of the Board of Directors of the Company, the Board of Directors of the Company approved (1) a first amendment to the Vertex Energy, Inc. Amended and Restated 2020 Equity Incentive Plan (the “2020 Plan”), to amend the 2020 Plan to allow for the grant of Restricted Stock Units (RSUs); previously the 2020 Plan allowed for the grant of Restricted Stock Shares, but not RSUs and the First Amendment updates the 2020 Plan to allow for the grant of RSUs; and (2) an increase in the number of shares available for future issuance under the 2020 Plan by 3,740,573 shares, to 5,240,574 shares, which represents 4% of the Company’s total outstanding shares of common stock as of December 31, 2023 (93,514,346 shares), pursuant to the terms of the 2020 Plan.
On April 15, 2024, the Company paid $2.1 million principal and $8.5 million interest with respect to the Term Loan according to the limited consent that was signed on March 28, 2024.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Introduction
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 thereto on the basis of management’s assessment to assist readers in understanding our results of operations, financial condition, and cash flows. As such, it should be read in conjunction with the interim unaudited financial statements and the notes thereto included in this Quarterly Report on Form 10-Q, and the audited financial statements and notes thereto and “Part II”, “Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the Securities and Exchange Commission on March 7, 2024 (the “Annual Report”). Unless the context requires otherwise, references to the “Company,” “we,” “us,” “our,” “Vertex”, “Vertex Energy” and “Vertex Energy, Inc.” refer specifically to Vertex Energy, Inc. and its consolidated subsidiaries.
Certain capitalized terms used below and otherwise defined below, have the meanings given to such terms in the footnotes to our unaudited consolidated financial statements included above under “Part I – Financial Information” – “Item 1. Financial Statements”.
Our logo and some of our trademarks and tradenames are used in this Report. This Report also includes trademarks, tradenames and service marks that are the property of others. Solely for convenience, trademarks, tradenames and service marks referred to in this Report may appear without the ®, ™ and SM symbols. References to our trademarks, tradenames and service marks are not intended to indicate in any way that we will not assert to the fullest extent under applicable law our rights or the rights of the applicable licensors if any, nor that respective owners to other intellectual property rights will not assert, to the fullest extent under applicable law, their rights thereto. We do not intend the use or display of other companies’ trademarks and trade names to imply a relationship with, or endorsement or sponsorship of us by, any other companies.
In this Quarterly Report on Form 10-Q, we may rely on and refer to information regarding the refining, re-refining, used oil and oil and gas industries in general from market research reports, analyst reports and other publicly available information, none of which we have commissioned. Although we believe that this information is reliable, we cannot guarantee the accuracy and completeness of this information, we have not independently verified any of it, and we have not commissioned any such reports or information.
The majority of the numbers presented below are rounded numbers and should be considered as approximate.
Unless the context otherwise requires and for the purposes of this report only:
● “Exchange Act” refers to the Securities Exchange Act of 1934, as amended;
● “SEC” or the “Commission” refers to the United States Securities and Exchange Commission; and
● “Securities Act” refers to the Securities Act of 1933, as amended.
Where You Can Find Other Information
We file annual, quarterly, and current reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”). Our SEC filings (reports, proxy and information statements, and other information) are available to the public over the Internet at the SEC’s website at www.sec.gov and are available for download, free of charge, soon after such reports are filed with or furnished to the SEC, on the “Investor Relations,” “SEC Filings” page of our website at www.vertexenergy.com. Information on our website is not part of this Report, and we do not desire to incorporate by reference such information herein. Copies of documents filed by us with the SEC are also available from us without charge, upon oral or written request to our Secretary, who can be contacted at the address and telephone number set forth on the cover page of this Report.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q (this “Report”) contains forward-looking statements within the meaning of the federal securities laws, including the Private Securities Litigation Reform Act of 1995, regarding future events and the future results of the Company that are based on current expectations, estimates, forecasts, and projections about the industry in which the Company operates and the beliefs and assumptions of the management of the Company. In some cases, you can identify
38
forward-looking statements by the following words: “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “ongoing,” “plan,” “potential,” “predict,” “project,” “should,” or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. Forward-looking statements are not a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time the statements are made and involve known and unknown risks, uncertainties and other factors that may cause our results, levels of activity, performance or achievements to be materially different from the information expressed or implied by the forward-looking statements in this Report. Factors that might cause or contribute to such differences include, but are not limited to, those discussed elsewhere in this Report, including under "Risk Factors", and in other reports the Company files with the Securities and Exchange Commission (“SEC” or the “Commission”), including the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, as filed with the SEC on March 7, 2024 (under the heading "Risk Factors" and in other parts of that report), which factors include:
•our need for additional funding, the availability of, and terms of, such funding, our ability to pay amounts due on such indebtedness, covenants of such indebtedness and security interests in connection therewith;
•risks associated with our outstanding indebtedness, including our outstanding Convertible Senior Notes and term loan, including amounts owed, restrictive covenants and security interests in connection therewith, and our ability to repay such debts and amounts due thereon (including interest) when due, and mandatory and special redemption provisions thereof, and conversion rights associated therewith, including dilution caused thereby (in connection with the Convertible Senior Notes);
•security interests, guarantees and pledges associated with our outstanding Loan and Security Agreement and Supply and Offtake Agreements, and risks associated with such agreements in general;
•risks associated with ongoing Phase 2 of the capital project currently in process at our Mobile, Alabama refinery, including costs and cost overruns, timing, delays and unanticipated problems associated therewith;
•health, safety, security and environment risks;
•the level of competition in our industry and our ability to compete and our ability to respond to changes in our industry;
•the loss of key personnel or failure to attract, integrate and retain additional personnel;
•our ability to protect our intellectual property and not infringe on others’ intellectual property;
•our ability to scale our business;
•our ability to maintain supplier relationships and obtain adequate supplies of feedstocks;
•our ability to obtain and retain customers;
•our ability to produce our products at competitive rates;
•our ability to execute our business strategy in a very competitive environment;
•trends in, and the market for, the price of oil and gas and alternative energy sources;
•our ability to maintain our relationships with Macquarie Energy North America Trading Inc., Shell, and Idemitsu;
•the impact of competitive services and products;
•our ability to complete and integrate future acquisitions;
•our ability to maintain insurance;
•pending and future litigation, potential adverse judgments and settlements in connection therewith, and resources expended in connection therewith;
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•rules and regulations making our operations more costly or restrictive;
•changes in environmental and other laws and regulations and risks associated with such laws and regulations;
•economic downturns both in the United States and globally;
•risks of increased regulation of our operations and products;
•negative publicity and public opposition to our operations;
•disruptions in the infrastructure that we and our partners rely on;
•an inability to identify attractive acquisition opportunities and successfully negotiate acquisition terms;
•liabilities associated with acquired companies, assets or businesses;
•interruptions at our facilities;
•unexpected changes in our anticipated capital expenditures resulting from unforeseen required maintenance, repairs, or upgrades;
•our ability to acquire and construct new facilities;
•prohibitions on borrowing and other covenants of our debt facilities;
•our ability to effectively manage our growth;
•decreases in global demand for, and the price of, oil;
•repayment of and covenants in our future debt facilities;
•changing rates of inflation and interest rates, the effects of war, and governmental responses thereto and possible recessions caused thereby;
•risks associated with our hedging activities, or our failure to hedge production;
•the volatility in the market price of compliance credits (primarily renewable identification numbers (RINs) needed to comply with the Renewable Fuel Standard (RFS) under Renewable and Low-Carbon Fuel Programs and emission credits needed under other environmental emissions programs, the requirement for us to purchase RINs in the secondary market to the extent we do not generate sufficient RINs internally, and the timing of such required purchases, if any;
•the lack of capital available on acceptable terms to finance our continued growth; and
•other risk factors included under “Risk Factors” in our latest Annual Report on Form 10-K and set forth below under “Risk Factors“.
In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characterizations of future events or circumstances are forward-looking statements.
You should read the matters described in, and incorporated by reference in, “Risk Factors” and the other cautionary statements made in this Report, and incorporated by reference herein, as being applicable to all related forward-looking statements wherever they appear in this Report. We cannot assure you that the forward-looking statements in this Report will prove to be accurate and therefore prospective investors are encouraged not to place undue reliance on forward-looking statements. All forward-looking statements included herein speak only as of the date of the filing of this Report. All subsequent written and oral forward-looking statements attributable to the Company, or persons acting on its behalf, are expressly qualified in their entirety by the cautionary statements above. Other than as required by law, we undertake no obligation to update or revise these forward-looking statements, even though our situation may change in the future.
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Overview and Business Activities
We are 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 refining, collection, aggregation, transportation, storage and sales of aggregated feedstock and refined products to end-users. All of these products are commodities that are subject to various degrees of product quality and performance specifications.
We currently provide our services in five states, primarily in the Gulf Coast and Midwest, regions of the United States. For the rolling twelve-month period ending March 31, 2024, we aggregated approximately 68.8 million gallons of used motor oil and other petroleum by-product feedstocks and managed the re-refining of approximately 60.9 million gallons of used motor oil with our proprietary vacuum gas oil (“VGO”) and Base Oil processes.
Mobile Refinery acquisition. Effective April 1, 2022, we completed the acquisition of a 75,000 bpd crude oil refinery located ten miles north of Mobile, in Saraland, Alabama (the “Mobile Refinery”) and related logistics assets, which include a deep-water draft, bulk loading terminal facility with 600,000 Bbls of storage capacity for crude oil and associated refined petroleum products located in Mobile, Alabama (the “Blakeley Island Terminal”). The terminal includes a dock for loading and unloading vessels with a pipeline tie-in, as well as the related logistics infrastructure of a high-capacity truck rack with 3-4 loading heads per truck, each rated at 600 gallons per minute (the “Mobile Truck Rack”). The Mobile Refinery currently processes light and sweet crude to produce different grades of gasoline, diesel fuel, jet fuel, and heavy olefin feed.
The Company paid a total of $75.0 million in consideration for the acquisition of the Mobile Refinery. In addition, we paid $16.4 million for previously agreed upon capital expenditures, miscellaneous prepaids and reimbursable items and an $8.7 million technology solution comprising the ecosystem required for the Company to run the Mobile Refinery after the acquisition. The Company also purchased certain crude oil and finished products inventories for $130.2 million owned by Shell at the Mobile Refinery.
As a result of the Mobile Refinery purchase, Vertex Refining and Shell Trading (US) Company (“STUSCO”) entered into a Crude Oil & Hydrocarbon Feedstock Supply Agreement (the “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.
Additionally, as a result of the Mobile Refinery purchase, we entered into several agreements with Macquarie Energy North America Trading Inc (“Macquarie”). Under these agreements (together, the “Inventory Financing Agreement”), Macquarie agreed to finance the Mobile Refinery’s crude supply and inventories, and Vertex agreed to provide storage and terminalling services to Macquarie.
Heartland Assets and Operations Sale. On February 1, 2023, HPRM LLC (“HPRM”), which is indirectly wholly-owned by the Company, entered into a Sale and Purchase Agreement (the “Sale Agreement”) with GFL Environmental Services USA, Inc. (“GFL”) whereby HPRM agreed to sell to GFL, and GFL agreed to purchase from HPRM, all of HPRM’s equity interest in Vertex Refining OH, LLC (“Vertex OH”), our then wholly-owned subsidiary. Vertex Operating, LLC, our wholly-owned subsidiary (“Vertex Operating”) and GFL Environmental Inc. (“GFL Environmental”), an affiliate of GFL, were also parties to the Sale Agreement, solely for the purpose of providing certain guarantees of the obligations of Heartland SPV and GFL. The sale also included all property and assets owned by Vertex OH, including inventory associated with the Heartland Refinery, and all real and leased property and permits owned by Vertex OH, and all used motor oil collection and recycling assets and operations owned by Vertex OH. See “Note 22. Discontinued Operations” of our Notes to Consolidated Financial Statements, included under “Item I Financial Statements”.
The transactions contemplated by the Sale Agreement closed on February 1, 2023.
We operate two business segments: the Refining and Marketing segment and the Black Oil and Recovery segment. For further description of the business and products of our segments, see “Results of Operations”, below.
Strategy and Plan of Operations
The principal elements of our strategy include:
Optimization of hydrocracker infrastructure between conventional and renewable fuels play. Beginning in the second quarter of 2022, we began a conversion project designed to modify the Mobile Refinery's hydrocracking unit to produce
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renewable diesel fuel on a standalone basis. The renewable diesel unit was commissioned on April 28, 2023, and on May 27, 2023, the Mobile Refinery began processing soybean oil into renewable diesel and achieved the Phase I installed capacity target of 8,000 barrels per day as anticipated. The Company closed out Phase I of the RD project as of June 30, 2023, which was funded entirely through existing cash on-hand and cash flow from operations. Beginning in the second quarter of 2023, the Company started Phase 2 of the RD project. Due to the significant macroeconomic headwinds over the past 12 months, many of which we believe will continue to occur over the next 18 to 36 months, we have decided to strategically pause our renewable diesel business and pivot to producing conventional fuels from the hydrocracker unit. We plan to reconfigure the hydrocracker in conjunction with a planned turnaround on the unit. In the future, based on the economics and macro conditions, we will optimize our hydrocracker capacity between conventional and renewables service. We believe this flexibility to produce based on market demand materially enhances our unit’s long-term value potential. Our engineering and operations teams have worked diligently to preserve our optionality for the unit and not degrade our ability to produce conventional products.
Expand Feedstock Supply Volume. We intend to expand our feedstock supply volume by growing our collection and aggregation operations. We plan to seek 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 seek 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 in the future 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 hope 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 if we are able to increase our supply of feedstock and re-refined products, that we will be in a position to 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.
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Results of Operations
We are engaged in operations across the petroleum value chain, including crude oil refining, collection, aggregation, transportation, storage, and sales of refined and re-refined products and aggregated feedstock. Our margins are a function of the difference between what we are able to pay for raw materials and the market prices for the range of products produced. The various petroleum products produced are typically a function of crude oil indices and are quoted on multiple exchanges such as the New York Mercantile Exchange (“NYMEX”). These prices are determined by a global market and can be influenced by many factors, including but not limited to supply/demand, weather, politics, and global/regional inventory levels. As such, we cannot provide any assurances regarding results of operations for any future periods, as numerous factors outside of our control affect the prices paid for raw materials and the prices (for the most part keyed to the NYMEX) that can be charged for such products. These factors include the supply of, and demand for, crude oil, and refined products, which in turn depend on changes in domestic and foreign economies; weather conditions; domestic and foreign political affairs; production levels; the marketing of competitive fuels; and government regulation. Additionally, for the near term, results of operations will be subject to further uncertainty, as the global markets and exchanges, including the NYMEX, continue to experience volatility.
We have experienced a decrease in gross and operating margins primarily driven by the decrease in gross profit at the Mobile Refinery as a result of a decrease in bench mark prices during the period, and the gross loss associated with the operation of the RD unit. This decrease was partially offset by an increase in gross margins generated in other businesses, including the gross profits generated by the Black Oil and Recovery segment.
The following table sets forth the high and low spot prices during the three months ended March 31, 2024, for our key benchmarks.
The following table sets forth the high and low spot prices during the three months ended March 31, 2023, for our key benchmarks.
The following charts sets forth the price indexes for our crude purchases and main finished products, (a) USGC ULSD – U.S. Gulf Coast Ultra-low sulfur diesel (ULSD), which is diesel fuel containing a maximum of 15 parts per million (ppm) of sulfur; (b) USGC CBOB – U.S. Gulf Coast Conventional Blendstock for Oxygenate Blending, which means conventional gasoline blendstock intended for blending with oxygenates downstream of the refinery where it was produced; and (c) Jet fuel produced at our Mobile Refinery, during the three months ended March 31, 2024:
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The following charts sets forth the price indexes for our renewable fuel feedstock purchases and main finished products, (a) refined, bleached, and deodorized (RBD) soybean oil per million (ppm) of sulfur; (b) NYMEX Heating Oil; and (c) biomass-based diesel RINs (D4 RIN), at our Renewable Diesel unit, during the three months ended March 31, 2024:
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Source: Argus Media, daily benchmarking price
Our production and sales of lower value products such as naphtha, VGO, LPGs and sulfur also impact our results of operations, especially when crude prices are high. Our results of operations are also significantly affected by our direct operating expenses, especially our labor costs. Safety, reliability and the environmental performance of our refineries’ operations are critical to our financial performance.
We operate two business segments: the Refining and Marketing segment and the Black Oil and Recovery segment. The table below shows our product categories by segment. For a further description of individual products, please refer to the Glossary of terms at the beginning of this document.
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Refining and Marketing(1) | Black Oil and Recovery (2) | |||||||
Gasolines | X | |||||||
Jet Fuel | X | |||||||
Distillates | X | |||||||
| Renewable diesel | X | |||||||
Base oil | X | |||||||
VGO/Marine fuel | X | X | ||||||
Other refined products (3) | X | X | ||||||
Pygas | X | |||||||
Metals (4) | X | |||||||
Other re-refined products (5) | X | X | ||||||
Terminalling | X | |||||||
Oil collection services | X | |||||||
(1) The Refining and Marketing segment consists primarily of the sale of refined hydrocarbon products such as gasoline, distillates, jet fuel, and intermediates refined at the Mobile Refinery and pygas and industrial fuels, which are produced at a third-party facility (Monument Chemical). During the second quarter of 2023, the Mobile Refinery began processing soybean oil into renewable diesel.
(2) The Black Oil segment’s continued operations consist primarily of the sale of (a) other re-refinery products, recovered products, and used motor oil; (b) specialty blending and packaging of lubricants, (c) transportation revenues; and (d) the sale of VGO (vacuum gas oil)/marine fuel; (e) petroleum products which include base oil and industrial fuels—which consist of used motor oils, cutterstock and fuel oil generated by our facilities; (f) oil collection services—which consist of used oil sales, burner fuel sales, antifreeze sales and service charges; (g) the sale of other re-refinery products including asphalt, condensate, recovered products, and used motor oil; (h) sale of ferrous and non-ferrous recyclable Metal(s) products that are recovered from manufacturing and consumption; and (i) revenues generated from trading/marketing of Group III Base Oils. On February 1, 2023, the Company sold its Heartland Assets and Operations (which formed a part of the Black Oil segment), and as such, has presented the Company’s Heartland Assets and Operations as discontinued operations.
(3) Other refinery products include the sales of base oil, cutterstock and hydrotreated VGO, naphtha, LPGs, sulfur and vacuum tower bottoms (VTB).
(4) 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.
(5) Other re-refinery products include the sales of asphalt, condensate, recovered products, and other petroleum products.
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Results of Operations
The following discussion includes comments and analysis relating to our results of operations. This discussion should be read in conjunction with “Item 1. Financial Statements” and is intended to provide investors with a reasonable basis for assessing our historical operations, however, it should not serve as the only criteria for predicting our future performance.
Consolidated Results of Operations
Set forth below are our results of operations for the three months ended March 31, 2024, as compared to the same periods in 2023 (in thousands):
| Three Months Ended March 31, | |||||||||||||||||
| 2024 | 2023 | Variance | |||||||||||||||
| Revenues | $ | 695,326 | $ | 691,142 | $ | 4,184 | |||||||||||
| Cost of revenues (exclusive of depreciation and amortization shown separately below) | 652,034 | 619,352 | 32,682 | ||||||||||||||
| Depreciation and amortization attributable to costs of revenues | 8,186 | 4,337 | 3,849 | ||||||||||||||
| Gross profit | 35,106 | 67,453 | (32,347) | ||||||||||||||
| Operating expenses: | |||||||||||||||||
| Selling, general and administrative expenses | 39,782 | 41,942 | (2,160) | ||||||||||||||
| Depreciation and amortization attributable to operating expenses | 1,104 | 1,016 | 88 | ||||||||||||||
| Total operating expenses | 40,886 | 42,958 | (2,072) | ||||||||||||||
| Income (loss) from operations | (5,780) | 24,495 | (30,275) | ||||||||||||||
| Other income (expense): | |||||||||||||||||
| Other income (expense) | (1,049) | 1,653 | (2,702) | ||||||||||||||
| Loss on change in value of derivative warrant liability | 6,658 | (9,185) | 15,843 | ||||||||||||||
| Interest expense | (17,683) | (12,477) | (5,206) | ||||||||||||||
| Total other expense | (12,074) | (20,009) | 7,935 | ||||||||||||||
| Income (loss) from continuing operation before income tax | (17,854) | 4,486 | (22,340) | ||||||||||||||
| Income tax expense | — | (1,013) | 1,013 | ||||||||||||||
| Income (loss) from continuing operations | (17,854) | 3,473 | (21,327) | ||||||||||||||
| Income from discontinued operations, net of tax | — | 50,340 | (50,340) | ||||||||||||||
| Net income (loss) | (17,854) | 53,813 | (71,667) | ||||||||||||||
| Net loss attributable to non-controlling interest from continuing operations | (120) | (50) | (70) | ||||||||||||||
| Net income (loss) attributable to Vertex Energy, Inc. | $ | (17,734) | $ | 53,863 | $ | (71,597) | |||||||||||
Our revenues and cost of revenues are significantly impacted by the renewable diesel (RD) unit at the Mobile Refinery, which began commercial production of RD in May 2023, and fluctuations in commodity prices. Increases (decreases) in commodity prices typically result in increases (decreases) in revenue and cost of revenues (i.e., feedstock costs). Additionally, from time to time, we have used hedging instruments to manage our exposure to underlying commodity prices.
First Quarter 2024 Compared to First Quarter 2023 Discussion
Comparability of consolidated results of operations between the three months ended March 31, 2024 and 2023, are affected by the operation of the RD unit, which started operation in May 2023, as well as a turnaround performed in the conventional Mobile Refinery unit during Q1 2024. See Refining and Marketing segment tables that segregate the impact of the Mobile Refinery for this period.
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During the three months ended March 31, 2024, compared to the same period in 2023, we saw a slight decrease in the volume of products we manage through our facilities. In addition, we saw an increase in operating costs (inclusive of depreciation and amortization) on a per barrel basis for the first quarter of 2024, as compared to the same period in 2023 due to the RD unit operation and increased price of direct material and indirect costs. Management of operating costs is critical to our ability to remain competitive in the marketplace, we continue to experience inflationary pressures across numerous cost categories. The key areas of impact are around transportation, labor, as well as fuel and energy related expenses.
During the three months ended March 31, 2024, total revenues increased approximately $4.2 million compared to the same period in 2023, which was primarily due to the increase in revenues from refined product and services of $1.7 million and $2.1 million, respectively.
During the three months ended March 31, 2024, total cost of revenues (exclusive of depreciation and amortization) increased approximately $32.7 million, which was the result of an increase of $44.7 million (excluding cost of intercompany sales) from the Mobile Refinery, offset by a $12.0 million decrease from other business, compared to the same period ended March 31, 2023. The main reasons for the $44.7 million increase in cost of revenues from the Mobile Refinery were the high crude oil and feedstock pricing and certain variable production costs. Our cost of revenues is affected by prices we pay for feedstocks and crude oil, inventory financing costs, and other operational costs at our facilities.
For the three months ended March 31, 2024, total depreciation and amortization expense attributable to cost of revenues was $8.2 million, compared to $4.3 million for the three months ended March 31, 2023, an increase of $3.3 million, mainly due to the RD unit operation in the first quarter of 2024, compared to no RD unit operations during the same period of 2023.
For the three months ended March 31, 2024, our gross profit decreased by $32.3 million from $67.5 million for the three months ended March 31, 2024 to $35.1 million during the current period. This decrease in gross profit was primarily driven by the decrease in gross profit at the Mobile Refinery as a result of a decreased crack spread during the period, and the gross loss associated with the operation of the RD unit. The Mobile Refinery unit gross profit decreased by $27.7 million for the current period compared to the prior period, and the RD unit generated 10.5 million in gross loss during the current period, which was offset by gross profit generated in other businesses, including 3.8 million in gross profit generated by the Black Oil and Recovery segment.
Overall, commodity prices were lower for the three months ended March 31, 2024, compared to the same period in 2023. The Gulf Coast 2-1-1 crack spread averaged $22.11 and $31.59 per barrel, respectively during the three months ended March 31, 2024 and 2023. We use crack spreads as a performance benchmark for our Mobile refining gross margin and as a comparison with other industry participants. The Gulf Coast 2-1-1 crack spread is calculated using two barrels of LLS (Louisiana Light Sweet crude oil) producing one barrel of USGC CBOB gasoline and one barrel of USGC ultra-low sulfur diesel. As a result, our fuel gross margin per barrel of throughput decreased 28% for the three months ended March 31, 2024, relative to the three months ended March 31, 2023.
Total operating expenses (excluding depreciation and amortization) decreased approximately $2.2 million for the three months ended March 31, 2024, compared to the same prior year’s period, which decrease was primarily driven by the reduction in legal costs during the current period.
We had interest expense of $17.7 million for the three months ended March 31, 2024, compared to interest expense of $12.5 million for the three months ended March 31, 2023, an increase of $5.2 million. This increase was due to the increased borrowing, accretion of deferred loan costs, and increase in interest expenses associated with Term Loan principal of $196.0 million as of March 31, 2024, as well as draws under our $169.7 million of inventory financing principal during the first quarter of 2024. The Term Loan principal was $152.1 million as of March 31, 2023 and the draws under our inventory financing principal were $107.9 million during the first quarter of 2023.
We had an approximately $6.7 million gain on change in value of derivative liability for the three months ended March 31, 2024, in connection with the warrants granted in connection with the Term Loan, compared to a loss on change in the value of our derivative liability of $9.2 million in the prior year’s period. This change was mainly due to the fluctuation in the market price of our common stock (and more specifically the decrease in the market price of our common stock during the current period, compared to the increase in the same period of prior year), and non-cash accounting adjustments in connection therewith.
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We had loss from continuing operations of approximately $17.9 million for the three months ended March 31, 2024, compared to income from continuing operations of $3.5 million for the three months ended March 31, 2023, an increase in loss from continuing operations of $21.3 million. The primary reason for the generation of net loss from continuing operations for the three months ended March 31, 2024, compared to the three months ended March 31, 2023, was attributable to the loss from RD unit operation for the three months ended March 31, 2024. The loss from the RD unit was primarily driven by higher feedstock prices.
Refining and Marketing Segment
Since April 1, 2022, the Refining and Marketing segment has generated most of its revenues from the sales of petroleum refined products processed at the Mobile Refinery. The Mobile Refinery processes crude oils into refined finished products which include gasolines, distillates including jet fuel, LPGs, and other residual fuels such as VTBs, VGO, olefins, reformate and sulfur. We market these finished products across the southeastern United States through a high-capacity truck rack, together with deep and shallow water distribution points capable of supplying waterborne vessels. Most of the Mobile Refinery production is sold to Macquarie Energy North America Trading Inc (“Macquarie”), under our Inventory Financing Agreement. See “Note 10. Inventory Financing Agreements” of our Notes to Consolidated Financial Statements, included under “Item 1 Financial Statements”.
The Refining and Marketing segment also includes revenues from gathering hydrocarbon streams in the form of petroleum distillates, transmix and other chemical products that have become off-specification during the transportation or refining process. These feedstock streams are purchased from pipeline operators, refineries, chemical processing facilities and third-party providers, and then processed at a third-party facility under our direction. The end products are typically three distillate petroleum streams (gasoline blendstock, pygas and fuel oil cutterstock), which are sold to major oil companies or to large petroleum trading and blending companies. The end products are delivered by barge and truck to customers. Additionally, this segment includes the wholesale distribution of gasoline, blended gasoline, and diesel for use as engine fuel to operate automobiles, trucks, locomotives, and construction equipment.
Results from operations from the Mobile Refinery have substantially changed our overall revenue, cost of revenue, net income, and earnings before interest, taxes, depreciation, and amortization. During the three months ended March 31, 2024 and 2023, the Mobile Refinery generated 92.4% of our total consolidated revenue. Set forth below are our results of operations and certain key performance indicators disaggregated to show the Mobile Refinery on a stand-alone basis to facilitate comparability between periods (in thousands, except key performance indicators):
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| Three Months Ended March 31, | |||||||||||||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||||||||||||||||||||||||||
| Refining and Marketing Segment (in thousands) | Conventional | Renewable | Total Mobile Refinery | Legacy Refining and Marketing | Total Refining and Marketing | Mobile Refinery | Legacy Refining and Marketing | Total Refining and Marketing | |||||||||||||||||||||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||||||||||||||||||||||||||
Refined products | $ | 563,441 | $ | 75,803 | $ | 639,244 | $ | 11,515 | $ | 650,759 | $ | 630,759 | $ | 22,283 | $ | 653,042 | |||||||||||||||||||||||||||||||
Re-refined products | — | — | — | 3,867 | 3,867 | — | 4,353 | 4,353 | |||||||||||||||||||||||||||||||||||||||
| Services | 2,719 | 362 | 3,081 | — | 3,081 | 1,933 | — | 1,933 | |||||||||||||||||||||||||||||||||||||||
| Revenues | 566,160 | 76,165 | 642,325 | 15,382 | 657,707 | 632,692 | 26,636 | 659,328 | |||||||||||||||||||||||||||||||||||||||
| Cost of revenues (exclusive of variable production costs and depreciation and amortization shown separately below) | 500,443 | 75,849 | 576,292 | 14,185 | 590,477 | 542,826 | 25,734 | 568,560 | |||||||||||||||||||||||||||||||||||||||
| Variable production costs attributable to costs of revenues | 25,651 | 6,846 | 32,497 | — | 32,497 | 21,252 | — | 21,252 | |||||||||||||||||||||||||||||||||||||||
| Depreciation and amortization attributable to costs of revenues | 2,558 | 3,932 | 6,490 | 51 | 6,541 | 3,144 | 150 | 3,294 | |||||||||||||||||||||||||||||||||||||||
| Gross profit (loss) | 37,508 | (10,462) | 27,046 | 1,146 | 28,192 | 65,470 | 752 | 66,222 | |||||||||||||||||||||||||||||||||||||||
| Operating expenses | |||||||||||||||||||||||||||||||||||||||||||||||
| Selling general and administrative expense | 16,061 | 9,382 | 25,443 | 704 | 26,147 | 24,681 | 1,805 | 26,486 | |||||||||||||||||||||||||||||||||||||||
| Depreciation and amortization attributable to operating expenses | 772 | 21 | 793 | — | 793 | 736 | 72 | 808 | |||||||||||||||||||||||||||||||||||||||
| Total operating expenses | 16,833 | 9,403 | 26,236 | 704 | 26,940 | 25,417 | 1,877 | 27,294 | |||||||||||||||||||||||||||||||||||||||
| Income (loss) from operations | 20,675 | (19,865) | 810 | 442 | 1,252 | 40,053 | (1,125) | 38,928 | |||||||||||||||||||||||||||||||||||||||
| Other income (expenses) | |||||||||||||||||||||||||||||||||||||||||||||||
| Other income | (685) | — | (685) | — | (685) | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Interest expense | (2,455) | (2,292) | (4,747) | — | (4,747) | (3,876) | — | (3,876) | |||||||||||||||||||||||||||||||||||||||
| Net income (loss) | $ | 17,535 | $ | (22,157) | $ | (4,622) | $ | 442 | $ | (4,180) | $ | 36,177 | $ | (1,125) | $ | 35,052 | |||||||||||||||||||||||||||||||
| Refining adjusted EBITDA * | $ | 33,107 | $ | (10,386) | $ | 22,721 | $ | 513 | $ | 23,234 | $ | 41,831 | $ | (970) | $ | 40,861 | |||||||||||||||||||||||||||||||
| Key performance indicators: | |||||||||||||||||||||||||||||||||||||||||||||||
| Fuel Gross Margin * | $ | 73,648 | $ | 3,829 | $ | 77,477 | $ | 1,354 | $ | 78,831 | $ | 103,802 | $ | 804 | $ | 104,606 | |||||||||||||||||||||||||||||||
| Adjusted Gross Margin* | $ | 46,610 | $ | (4,936) | $ | 41,674 | $ | 1,166 | $ | 42,840 | $ | 63,368 | $ | 685 | $ | 64,053 | |||||||||||||||||||||||||||||||
Fuel Gross Margin Per Barrel of Throughput (1)* | $ | 12.63 | $ | 10.29 | $ | 12.49 | n/a | n/a | $ | 16.17 | n/a | n/a | |||||||||||||||||||||||||||||||||||
Adjusted Gross Margin Per Barrel of Throughput (1)* | $ | 8.00 | $ | (13.26) | $ | 6.72 | n/a | n/a | $ | 9.87 | n/a | n/a | |||||||||||||||||||||||||||||||||||
USGC 2-1-1 Crack Spread Per Barrel (2) | $ | 22.11 | n/a | n/a | n/a | n/a | $ | 31.59 | n/a | n/a | |||||||||||||||||||||||||||||||||||||
Operating Expenses Per Barrel of Throughput (3) | $ | 2.75 | $ | 25.21 | $ | 4.10 | n/a | n/a | $ | 3.84 | n/a | n/a | |||||||||||||||||||||||||||||||||||
Variable Production Costs Per Barrel of Throughput (4) | $ | 4.40 | $ | 18.39 | $ | 5.24 | n/a | n/a | $ | 3.31 | n/a | n/a | |||||||||||||||||||||||||||||||||||
* See “Non-U.S. GAAP Financial Measures and Key Performance Indicators” below.
(1) Fuel gross margin per throughput barrel is calculated as fuel gross margin divided by total throughput barrels for the period presented. Adjusted gross margin per throughput barrel is calculated as adjusted gross margin divided by total throughput barrels for the periods presented. These calculations are nominal to the legacy business.
(2) The crack spread USGC 2-1-1 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 fuel gross margin and as a comparison with other industry participants. Crack spreads can fluctuate significantly, particularly when prices of refined products do not move in the same direction as the cost of crude oil. To calculate the crack spread we believe most closely relates to the crude intakes and products at the Mobile Refinery, we use two barrels of Louisiana Light Sweet crude oil, producing one barrel of USGC CBOB gasoline (U.S. Gulf Coast Conventional Blendstock for Oxygenate Blending, which means conventional gasoline blendstock intended for blending with oxygenates downstream of the refinery where it was
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produced) and one barrel of USGC ULSD (U.S. Gulf Coast Ultra-low sulfur diesel (ULSD), which is diesel fuel containing a maximum of 15 parts per million (ppm) of sulfur). These calculations are nominal to the legacy business.
(3) Operating expenses per throughput barrel are calculated as operating expenses minus depreciation and amortization divided by total throughput barrels for the period presented. These calculations are nominal to the legacy business.
(4) Variable production costs per barrel of throughput are calculated by dividing variable production costs attributable to cost of revenues by total throughput barrels for the period presented. Included in variable production costs attributable to cost of revenues are personnel costs, utilities, repair and maintenance costs, and other miscellaneous costs to operate the refinery. These calculations are nominal to the legacy business.
The following table shows average throughput and product yield at the Mobile Refinery for three months ended March 31, 2024 and 2023.
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||
| Conventional | Renewable | Total | Conventional | ||||||||||||||||||||
| Refinery throughput (bpd) | |||||||||||||||||||||||
| Crude oil | 64,065 | — | 64,065 | 71,328 | |||||||||||||||||||
Renewable feedstocks (1) | — | 4,090 | 4,090 | — | |||||||||||||||||||
| Total throughput | 64,065 | 4,090 | 68,155 | 71,328 | |||||||||||||||||||
| Refinery Yields (bpd) | |||||||||||||||||||||||
| Gasolines | 14,678 | — | 14,678 | 15,723 | |||||||||||||||||||
| Distillates | 13,441 | — | 13,441 | 14,720 | |||||||||||||||||||
| Jet fuel | 12,595 | — | 12,595 | 12,789 | |||||||||||||||||||
Other (2) | 23,428 | — | 23,428 | 26,119 | |||||||||||||||||||
| Renewable diesel | — | 4,003 | 4,003 | — | |||||||||||||||||||
| Total yields | 64,142 | 4,003 | 68,145 | 69,351 | |||||||||||||||||||
(1) The renewable diesel unit became operational on May 27, 2023.
(2) Other includes intermediates and LPGs.
First Quarter 2024 Compared to First Quarter 2023 Discussion
Our Refining and Marketing Segment includes our Mobile Refinery and Legacy Refining and Marketing. The RD unit of Mobile Refinery began operation in May 2023. For the Legacy Refining and Marketing, our Marine Fuel Service began operation in May 2023, through our wholly-owned subsidiary, Crystal Energy, LLC (“Crystal Energy”), a wholesale distributor of gasoline, blended gasoline, and diesel for use as engine fuel to operate automobiles, trucks, locomotives, and construction equipment, which we decided to shut down in December 2023. These business changes significantly affected revenue and cost of revenue of our Refining and Marketing Segment during the three months ended March 31, 2024, compared to the same period of 2023.
Revenues from the Mobile Refinery were $642.3 million and 6.3 million barrels of hydrocarbon products were refined for the first quarter in 2024, compared to $632.7 million of revenue and 6.3 million barrels of hydrocarbon products being refined for the same period in 2023. The increase in revenues was primarily due to the operation of the RD unit during the current period when compared to the absence of such operation for the comparative period. The cost of revenues (exclusive of depreciation and amortization) from the Mobile Refinery increased $33.5 million and depreciation and amortization attributable to cost of sales increased $3.3 million for the first quarter of 2024, compared to the same period in 2023, mainly due to the high cost of feedstock for operation of the RD unit during the current period when compared to the absence of such costs as a result of the RD unit not being live during the comparative period.
Gross profit for the Mobile Refinery decreased $38.4 million for three months ended March 31, 2024. This decrease in gross profit was primarily driven by a decreased crack spread during the period, and the gross loss associated with the operation of the RD unit.
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The Mobile Refinery had a $0.8 million increase in operational expenses for the three months ended March 31, 2024, as compared to the same period in 2023. The slight increase was mainly due to the effects of higher costs associated with the operation of the RD unit.
Legacy Refining and Marketing revenues decreased $11.3 million during the three months ended March 31, 2024, as compared to the same period in 2023. Cost of revenues (exclusive of depreciation and amortization) from the Legacy Refining and Marketing decreased $11.5 million for the first quarter in 2024 compared to the same period in 2023. The decreases in both revenue and cost of sales were mainly due to Crystal Energy winding down operations in December 2023, partially offset by the operations of our Marine Fuels division, which began operations in April 2023.
Our Legacy Refining and Marketing business had a $1.1 million decrease in operational expenses for first quarter of 2024, as compared to the same period in 2023. The decreases in both revenue and cost of sales were mainly due to Crystal Energy winding down operations in December 2023, partially offset by the operations of our Marine Fuels division, which began operations in April 2023.
Interest expense for the segment increased $0.9 million during the first quarter of 2024, as compared to the same period in 2023, mainly due to the interest expenses associated with the draws under our $169.7 million of inventory financing principal during the first quarter of 2024. The draws under the inventory financing principal were $107.9 million during the first quarter of 2023.
Black Oil and Recovery Segment
After the acquisition of the Mobile Refinery on April 1, 2022, the revenue of our Black Oil and Recovery segments are less than 10% of consolidated revenue. As a result, we decided, beginning with the third quarter of fiscal 2022, to combine our Black Oil and Recovery segment into one segment which is engaged in operations across the entire used motor oil recycling value chain, including refinement, collection, aggregation, transportation, storage, recovery, and sales of aggregated feedstock and re-refined products to end-users. We collect and purchase used oil directly from generators such as oil change service stations, automotive repair shops, manufacturing facilities, petroleum refineries, petrochemical manufacturing operations, and a diverse network of suppliers who operate similar collection businesses to ours. We own a fleet of collection vehicles, which routinely visit generators to collect and purchase used motor oil.
We operate a refining facility in Baytown, Texas that uses our proprietary Thermal Chemical Extraction Process (“TCEP”), and we also utilize third-party processing facilities. We use TCEP to pre-treat used oil feedstock; prior to shipping to our facility in Marrero, Louisiana, where we re-refine used motor oil and produce VGO, which is then sold via barge to crude refineries to be utilized as an intermediate feedstock in the refining process, as well as to the marine fuels market. We also operate a re-refining complex located in Belle Chasse, Louisiana (the “Myrtle Grove facility”). This facility includes ground storage tanks with over 8.6 million gallons of storage capacity. These assets are used by both the Black Oil and Recovery and Refining and Marketing segments. In addition, we also utilize third parties for the transportation and storage of used oil feedstocks. In many cases, we have contractual purchase and sale agreements with our suppliers and customers, respectively. We believe these contracts are beneficial to all parties involved because it ensures that a minimum volume is purchased from collectors and generators, a minimum volume is sold to our customers, and we are able to minimize our inventory risk by a spread between the costs to acquire used oil and the revenues received from the sale and delivery of used oil.
We also operate a generator solutions company for the proper recovery and management of hydrocarbon streams and other petroleum-based products, together with the recovery, processing and sale of ferrous and non-ferrous recyclable metal(s) products that are recovered from manufacturing and consumption.
The Black Oil and Recovery Segment includes our used motor oil business (the “UMO Business”), which includes the Heartland Assets and Operations, which is presented as discontinued operations. Refer to “Note 22. Discontinued Operations” of our Condensed Notes to Consolidated Financial Statements, included under “Item 1. Financial Statements”.
The table below shows the operating results of Black Oil and Recovery Segment for the three months ended March 31, 2024 and 2023, including revenues by product (in thousands):
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| Three Months Ended March 31, | |||||||||||||||||
| Black Oil and Recovery | 2024 | 2023 | Variance* | ||||||||||||||
| Revenues | |||||||||||||||||
| Refined products: | |||||||||||||||||
Other refinery products (1) | $ | 31,724 | $ | 29,423 | $ | 2,301 | |||||||||||
| Re-refined products: | |||||||||||||||||
Metals (2) | 3,442 | 3,413 | 29 | ||||||||||||||
Other re-refined products (3) | 1,773 | 998 | 775 | ||||||||||||||
| Services: | |||||||||||||||||
| Oil collection services | 1,702 | 713 | 989 | ||||||||||||||
| Revenues | 38,641 | 34,547 | 4,094 | ||||||||||||||
| Cost of revenues (exclusive of depreciation and amortization shown separately below) | 30,082 | 30,418 | 336 | ||||||||||||||
| Depreciation and amortization attributable to costs of revenues | 1,645 | 1,043 | (602) | ||||||||||||||
| Gross profit | 6,914 | 3,086 | 3,828 | ||||||||||||||
| Operating expenses | |||||||||||||||||
| Selling general and administrative expense | 5,397 | 4,799 | 598 | ||||||||||||||
| Depreciation and amortization attributable to operating expenses | 72 | 38 | 34 | ||||||||||||||
| Total operating expenses | 5,469 | 4,837 | 632 | ||||||||||||||
| Income (loss) from operations | 1,445 | (1,751) | 3,196 | ||||||||||||||
| Other income (expenses) | |||||||||||||||||
| Other income (expenses) | (359) | 1,655 | (2,014) | ||||||||||||||
| Interest expense | (96) | (57) | (39) | ||||||||||||||
| Net income (loss) | $ | 990 | $ | (153) | $ | 1,143 | |||||||||||
* Favorable variances are represented by positive numbers and unfavorable variances are represented by negative numbers.
(1) Other refinery products are finished refined products such as VGO, LPGs, sulfur and vacuum tower bottoms (VTB).
(2) Metals consist of recoverable ferrous and non-ferrous recyclable metals from manufacturing and consumption. Scrap metal can be recovered from pipes, barges, boats, building supplies, surplus equipment, tanks, and other items consisting of metal composition. These materials are segregated, processed, cut-up and sent back to a steel mill for re-purposing.
(3) Other re-refinery products include the sales of asphalt, condensate, recovered products, and other petroleum products.
First Quarter 2024 to First Quarter 2023 Highlights:
Revenue from operations for our Black Oil and Recovery Segment increased $4.1 million for the three months ended March 31, 2024, compared to 2023, as a result of increases in commodity prices.
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Cost of revenues (exclusive of depreciation and amortization) for our Black Oil and Recovery Segment decreased $0.3 million for the three months ended March 31, 2024, compared to 2023, primarily due to favorable costs to collect feedstock.
The total income from operations from the Black Oil and Recovery Segment was $1.4 million for the three months ended March 31, 2024, which increased $3.2 million compared to the same period ended March 31, 2023, primarily due to an increase in revenues from VGO, re-refined products, and oil collection services.
Non-U.S. GAAP Financial Measures and Key Performance Indicators
In addition to our results calculated under generally accepted accounting principles in the United States (“GAAP”), in this Report we also present certain non-U.S. GAAP financial measures and key performance indicators for the Refining and Marketing segment, which constitutes approximately 95% of total consolidated revenues.
Non-U.S. GAAP financial measures include Adjusted Gross Margin, Fuel Gross Margin and Refining Adjusted EBITDA, as a whole (collectively, the “Non-U.S. GAAP Financial Measures”).
Key performance indicators include Adjusted Gross Margin, Fuel Gross Margin and Refining Adjusted EBITDA for Conventional, Renewable and the Mobile Refinery as a whole, and Fuel Gross Margin Per Barrel of Throughput and Adjusted Gross Margin Per Barrel of Throughput for Conventional, Renewable and the Mobile Refinery as a whole (collectively, the “KPIs”).
Each of the Non-U.S. GAAP Financial Measures and KPIs are discussed in greater detail below.
The (a) Non-U.S. GAAP Financial Measures are “non-U.S. GAAP financial measures”, and (b) the KPIs are, presented as supplemental measures of the Company’s performance. They are not presented in accordance with U.S. GAAP. We use the Non-U.S. GAAP Financial Measures and KPIs as supplements to U.S. 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 U.S. 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. The Non-U.S. GAAP Financial Measures and KPIs are presented because we believe they provide additional useful information to investors due to the various noncash items during the period. Non-U.S. GAAP financial information and KPIs similar to the Non-U.S. GAAP Financial Measures and KPIs are also frequently used by analysts, investors and other interested parties to evaluate companies in our industry.
The Non-U.S. GAAP Financial Measures and KPIs 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 U.S. GAAP. Some of these limitations are: the Non-U.S. GAAP Financial Measures and KPIs do not reflect cash expenditures, or future requirements for capital expenditures, or contractual commitments; the Non-GAAP Financial Measures and KPIs do not reflect changes in, or cash requirements for, working capital needs; the Non-GAAP Financial Measures and KPIs 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, the Non-U.S. GAAP Financial Measures and KPIs do not reflect any cash requirements for such replacements; the Non-U.S. GAAP Financial Measures and KPIs represent only a portion of our total operating results; and other companies in this industry may calculate the Non-U.S. GAAP Financial Measures and KPIs differently than we do, limiting their usefulness as a comparative measure.
You should not consider the Non-U.S. GAAP Financial Measures and KPIs in isolation, or as substitutes for analysis of the Company’s results as reported under U.S. 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-U.S. GAAP Financial Measures and KPIs to the most comparable U.S. 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-U.S. GAAP Financial Measures and KPIs in conjunction with the most directly comparable U.S. GAAP financial measure.
Adjusted Gross Margin.
Adjusted Gross Margin is defined as gross profit (loss) plus or minus unrealized gain or losses on hedging activities and inventory valuation adjustments.
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Fuel Gross Margin
Fuel Gross Margin is defined as adjusted gross profit (loss) plus or minus operating expenses and depreciation attributable to cost of revenues and other non-fuel items included in costs of revenues including realized gain or losses on hedging activities, Renewable Fuel Standard (RFS) costs (mainly related to Renewable Identification Numbers (RINs)), fuel financing costs and other revenues and cost of sales items.
Fuel Gross Margin Per Barrel of Throughput.
Fuel Gross Margin Per Barrel of Throughput is calculated as fuel gross margin divided by total throughput barrels for the period presented.
Adjusted Gross Margin Per Barrel of Throughput.
Adjusted Gross Margin Per Barrel Throughput is calculated as adjusted gross margin divided by total throughput barrels for the period presented.
Refining Adjusted EBITDA.
Refining Adjusted EBITDA represents net income (loss) from operations before interest expenses, taxes, depreciation and amortization, plus or minus unrealized gain or losses on hedging activities, inventory adjustments, acquisition costs, and gain or loss on sale of assets, environmental reserves and certain other unusual or non-recurring charges included in selling, general, and administrative expenses.
The following tables reconcile GAAP gross profit (loss) to Adjusted Gross Margin, Fuel Gross Margin, Fuel Gross Margin per Barrel of Throughput, Adjusted Gross Margin per Barrel of Throughput and Refining Adjusted EBITDA for the periods presented (in thousands):
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Three Months Ended March 31, | |||||||||||||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||||||||||||||||||||||||||
| Conventional | Renewable | Mobile Refinery Total | Legacy Refining and Marketing | Total Refining and Marketing | Mobile Refinery | Legacy Refining and Marketing | Total Refining and Marketing | ||||||||||||||||||||||||||||||||||||||||
| Gross profit (loss) | $ | 37,508 | $ | (10,462) | $ | 27,046 | $ | 1,146 | $ | 28,192 | $ | 65,470 | $ | 752 | $ | 66,222 | |||||||||||||||||||||||||||||||
| Unrealized (gain) loss on hedging activities | (555) | 934 | 379 | 20 | 399 | (570) | (67) | (637) | |||||||||||||||||||||||||||||||||||||||
| Inventory valuation adjustments | 9,657 | 4,592 | 14,249 | — | 14,249 | (1,532) | — | (1,532) | |||||||||||||||||||||||||||||||||||||||
| Adjusted Gross Margin | 46,610 | (4,936) | 41,674 | 1,166 | 42,840 | 63,368 | 685 | 64,053 | |||||||||||||||||||||||||||||||||||||||
| Variable production costs included in cost of revenues | 25,651 | 6,846 | 32,497 | — | 32,497 | 21,252 | — | 21,252 | |||||||||||||||||||||||||||||||||||||||
| Depreciation and amortization attributable to costs of revenues | 2,558 | 3,932 | 6,490 | 51 | 6,541 | 3,144 | 150 | 3,294 | |||||||||||||||||||||||||||||||||||||||
| RFS expense (mainly RINs) | (857) | — | (857) | — | (857) | 16,115 | — | 16,115 | |||||||||||||||||||||||||||||||||||||||
| Realized loss on hedging activities | 2,577 | (1,783) | 794 | 137 | 931 | (439) | (31) | (470) | |||||||||||||||||||||||||||||||||||||||
| Financing costs | (172) | 132 | (40) | — | (40) | 2,295 | — | 2,295 | |||||||||||||||||||||||||||||||||||||||
| Other revenues | (2,719) | (362) | (3,081) | — | (3,081) | (1,933) | — | (1,933) | |||||||||||||||||||||||||||||||||||||||
| Fuel Gross Margin | $ | 73,648 | $ | 3,829 | $ | 77,477 | $ | 1,354 | $ | 78,831 | $ | 103,802 | $ | 804 | $ | 104,606 | |||||||||||||||||||||||||||||||
| Throughput (bpd) | 64,065 | 4,090 | 68,155 | n/a | n/a | 71,328 | n/a | n/a | |||||||||||||||||||||||||||||||||||||||
| Fuel Gross Margin Per Barrel of Throughput | $ | 12.63 | $ | 10.29 | $ | 12.49 | n/a | n/a | $ | 16.17 | n/a | n/a | |||||||||||||||||||||||||||||||||||
| Adjusted Gross Margin Per Barrel of Throughput | $ | 8.00 | $ | (13.26) | $ | 6.72 | n/a | n/a | $ | 9.87 | n/a | n/a | |||||||||||||||||||||||||||||||||||
| Net income (loss) | $ | 17,535 | $ | (22,157) | $ | (4,622) | $ | 442 | $ | (4,180) | $ | 36,177 | $ | (1,125) | $ | 35,052 | |||||||||||||||||||||||||||||||
| Unrealized gain on hedging activities | (555) | 934 | 379 | 20 | 399 | (570) | (67) | (637) | |||||||||||||||||||||||||||||||||||||||
| Depreciation and amortization | 3,330 | 3,953 | 7,283 | 51 | 7,334 | 3,880 | 222 | 4,102 | |||||||||||||||||||||||||||||||||||||||
| Interest expenses | 2,455 | 2,292 | 4,747 | — | 4,747 | 3,876 | — | 3,876 | |||||||||||||||||||||||||||||||||||||||
| Inventory valuation adjustment | 9,657 | 4,592 | 14,249 | — | 14,249 | (1,532) | — | (1,532) | |||||||||||||||||||||||||||||||||||||||
| (Gain) loss on sale of assets | 685 | — | 685 | — | 685 | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Refining Adjusted EBITDA | $ | 33,107 | $ | (10,386) | $ | 22,721 | $ | 513 | $ | 23,234 | $ | 41,831 | $ | (970) | $ | 40,861 | |||||||||||||||||||||||||||||||
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Liquidity and Capital Resources
Our primary sources of liquidity have historically included cash flow from operations, proceeds from notes offerings, bank borrowings, term loans, public equity offerings and other financial arrangements. Uses of cash have included capital expenditures, acquisitions and general working capital needs.
The success of our 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.
As of March 31, 2024, the Company has evaluated its ability to continue as a going concern. Management has considered various factors, including historical operating results, liquidity, financial condition, and other relevant conditions and events. Based on this evaluation, management has determined that there is substantial doubt about the Company's ability to continue as a going concern within one year of the financial statement issuance date primarily due to the Term Loan maturing on April 1, 2025. Management's plans to mitigate the going concern risk include current efforts to refinance the debt of the Company with a new lender group, and the various efforts underway to reduce and minimize costs throughout the organization. In summary, 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. However, there can be no assurance that these plans will be successful.
We had total assets of approximately $835.1 million as of March 31, 2024, compared to $854.6 million at December 31, 2023. The decrease was mainly due to the decrease of the right of use assets that were acquired via operating lease and financing leases, and decreases in prepaid expenses and other current assets during the three months ended March 31, 2024.
We had total current liabilities of approximately $337.0 million as of March 31, 2024, compared to $328.8 million at December 31, 2023. We had total liabilities of $652.1 million as of March 31, 2024, compared to total liabilities of $654.2 million as of December 31, 2023. The increase in current liabilities was mainly due to increases in our obligations under inventory financing agreements , and the slight decrease in long-term liabilities was mainly due to a decrease in the right of use liabilities related to operating and finance leases, along with the decreases in derivative liabilities, which was caused by the increased stock price, during the three months ended March 31, 2024, compared to December 31, 2023.
We had working capital of approximately $8.0 million as of March 31, 2024, compared to working capital of $23.2 million as of December 31, 2023. The decrease in working capital from December 31, 2023, to March 31, 2024, is mainly due to the increase in obligations under inventory financing arrangements and decrease in cash and cash equivalents due to fixed asset spent during the three months ended March 31, 2024.
Our future operating cash flows will vary based on a number of factors, many of which are beyond our control, including the effects of inflation, increasing interest rates, commodity prices, the cost of recovered oil, and the ability to turn our inventory. Other factors that have affected and are expected to continue to affect earnings and cash flow are transportation, processing, and storage costs. Over the long term, our operating cash flows will also be impacted by our ability to effectively manage our administrative and operating costs. Additionally, we may incur more capital expenditures related to the Mobile Refinery in the future.
Cash Flows from Operating, Investing and Financing Activities
Our current near term plans include continuing to transition the majority of our assets and operations towards our strategy of becoming a leading pure-play energy transition company. The Mobile 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 renewable diesel unit was commissioned on April 28, 2023, and mechanical completion was achieved in March 2023. The capital project modified the Mobile Refinery’s existing hydrocracking unit to produce renewable diesel fuel on a standalone basis. The refinery commenced production of approximately 8,000 - 10,000 barrels per day (bpd) of renewable diesel in the second quarter of 2023, with production volumes able to ramp up to approximately 14,000 bpd.
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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; and
(4)the status of planned acquisitions and divestitures and ongoing capital projects at our facilities.
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 three months ended March 31, 2024 and 2023, were as follows (in thousands):
| Three Months Ended March 31, | ||||||||||||||
| 2024 | 2023 | |||||||||||||
| Beginning cash, cash equivalents and restricted cash | $ | 80,573 | $ | 146,187 | ||||||||||
| Net cash provided by (used in): | ||||||||||||||
| Operating activities | (29,126) | (36,801) | ||||||||||||
| Investing activities | (12,150) | 13,302 | ||||||||||||
| Financing activities | 26,452 | (27,570) | ||||||||||||
| Net decrease in cash, cash equivalents and restricted cash | (14,824) | (51,069) | ||||||||||||
| Ending cash, cash equivalents and restricted cash | $ | 65,749 | $ | 95,118 | ||||||||||
The analysis of cash flow activities below and the table above, is combined for both continued and discontinued operations, whereas the consolidated statement of cash flows included in this report includes only cash flow information for our continued operations.
Our current primary sources of liquidity are cash generated from operations, and cash flows from borrowing.
Net cash used in operating activities was approximately $29.1 million for the three months ended March 31, 2024, as compared to net cash used of $36.8 million in 2023. The primary reasons for the decrease in cash used in operating activities for the three months period ended March 31, 2024, compared to the same period in 2023, were due to higher accounts payable, accrued expenses, and prepaid and other current assets balances offset by higher accounts receivable and other receivables, inventory and prepaid and other current asset balances during the prior year comparative period, along with the loss from operations generated from the RD unit during the current period mainly due to higher feedstock prices.
Investing activities used cash of approximately $12.2 million for the three months ended March 31, 2024, as compared to providing cash of $13.3 million during the corresponding period in 2023, due mainly to the sale of the Heartland Assets and Operations on February 1, 2023, compared to fixed assets purchased for the Mobile Refinery during the current period.
Financing activities provided cash of approximately $26.5 million for the three months ended March 31, 2024, as compared to using cash of $27.6 million during the corresponding period in 2023. Financing activities for the three months ended March 31, 2024, were mainly comprised of principal payments for various short term notes of $4.5 million, offset by borrowing from inventory financing of $28.3 million and $3.2 million of proceeds from note payable. Financing activities for
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the three months ended March 31, 2023, were mainly comprised of the payments for inventory financing $11.3 million, for notes payable and capital leases of $17.2 million.
More information regarding our loan agreements, leases, insurance premium finance and Convertible Senior Notes, can be found under “Note 15. Financing Agreements” of our Condensed Notes to Consolidated Financial Statements, included under “Item 1. Financial Statement”.
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 which may be material. “Note 2. Summary of Critical Accounting Policies and Estimates” in Part I, Item 1 of this Quarterly Report on Form 10-Q and in the Notes to Consolidated Financial Statements in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2023 (the “2023 Form 10-K”), and “Critical Accounting Policies and Estimates” in Part II, Item 7 of the 2023 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 2023 Form 10-K.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market Risk
Our revenues and cost of revenues are affected by fluctuations in the value of energy related products. We attempt to mitigate much of the risk associated with the volatility of relevant commodity prices by using our knowledge of the market to obtain feedstock at attractive costs, by efficiently managing the logistics associated with our products, by turning our inventory over quickly, and by selling our products into markets where we believe we can achieve the greatest value.
Interest Rate Risk
We are exposed to interest rate risks primarily through borrowings under various bank facilities. Interest on these facilities is based upon variable interest rates using Money Rates quoted from The Wall Street Journal or Federal Funds rate as the base rate.
Changes in interest rates could also have a material adverse impact on our earnings and cash flows. Because our future notes payable are expected to have variable interest rates, our business results are expected to be subject to fluctuations in interest rates. Changes in market interest rates may influence our financing costs, returns on financial investments and the valuation of derivative contracts and could reduce our earnings and cash flows.
At March 31, 2024, the Company had one variable-rate term loan outstanding.
Commodity Price Risk
We are exposed to market risks related to the volatility of crude oil and refined oil products. Our financial results can be significantly affected by changes in these prices which are driven by global economic and market conditions. We attempt to mitigate much of the risk associated with the volatility of relevant commodity prices by using our knowledge of the market to obtain feedstock at attractive costs, by efficiently managing the logistics associated with our products, by turning our inventory over quickly, and by selling our products into markets where we believe we can achieve the greatest value.
Compliance Program Price Risk
As a producer of transportation fuels from crude oil, our Refining and Marketing Segment is required to blend biofuels into the products it produces or purchase RINs in the open market in lieu of blending to meet the mandates established by the EPA. To the degree we are unable to blend the required amount of biofuels to satisfy our renewable volume obligation (RVO) (the volume of renewable fuels we are obligated to sell, based on a percentage of our total fuel sales), we must purchase RINs on the open market. To mitigate the impact of this risk on our results of operations and cash flows, we may purchase RINs when the price of these instruments is deemed favorable.
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Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We have established and maintain a system of disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports filed with the SEC pursuant to the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Commission and that such information is accumulated and communicated to our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), as appropriate, to allow timely decisions regarding required disclosures.
Management, with the participation of our CEO and CFO, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this report. As of March 31, 2024, based on the evaluation of these disclosure controls and procedures, and in light of the material weakness we found in our internal controls over financial reporting as of December 31, 2023 (as described in greater detail in our annual report on Form 10-K for the year ended December 31, 2023), our CEO and CFO have concluded that our disclosure controls and procedures were not effective to provide reasonable assurance that information required to be disclosed in our reports filed with the Securities and Exchange Commission pursuant to the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Commission and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosures.
Remediation Efforts to Address Material Weaknesses
We believe the planned remedial measures described in Part II, “Item 9A, Controls and Procedures” in our Annual Report on Form 10-K for the year ended December 31, 2023, and others that may be implemented, will remediate these material weaknesses. However, these material weaknesses will not be considered formally remediated until controls have operated effectively for a sufficient period of time and management has concluded, through testing, that the controls are operating effectively.
Inherent Limitations over Internal Controls
Management, including the Company’s Chief Executive Officer and Chief Financial Officer, does not expect that the Company’s internal controls will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, any evaluation of the effectiveness of controls in future periods are subject to the risk that those internal controls may become inadequate because of changes in business conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Changes in Internal Control Over Financial Reporting
We regularly review our system of internal control over financial reporting to ensure we maintain an effective internal control environment. There were no changes in our internal control over financial reporting that occurred during the three months ended March 31, 2024, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II – OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we may become party to litigation or other legal proceedings that we consider to be a part of the ordinary course of our business.
Such current litigation or other legal proceedings are described in, and incorporated by reference in, this “Item 1. Legal Proceedings” of this Form 10-Q from, “Part I” - “Item 1. Financial Statements” in the Notes to Consolidated Financial Statements in “Note 4. Commitments and Contingencies”, under the heading “Litigation”. The Company believes that the resolution of currently pending matters will not individually or in the aggregate have a material adverse effect on our financial condition or results of operations. However, assessment of the current litigation or other legal claims could change in light of the discovery of facts not presently known to the Company or by judges, juries or other finders of fact, which are not in accord with management’s evaluation of the possible liability or outcome of such litigation or claims.
Additionally, the outcome of litigation is inherently uncertain. If one or more legal matters were resolved against the Company in a reporting period for amounts in excess of management’s expectations, the Company’s financial condition and operating results for that reporting period could be materially adversely affected.
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Item 1A. Risk Factors
Summary Risk Factors
We face risks and uncertainties related to our business, many of which are beyond our control. In particular, risks associated with our business include:
•our need for additional funding, the availability of, and terms of, such funding;
•our ability to pay amounts due on outstanding indebtedness, including outstanding term loans, covenants of such indebtedness, including restrictions on further borrowing, and security interests in connection therewith;
•the terms of our agreements with Macquarie and Idemitsu, including termination rights associated therewith, and our ability to find replacement partners, in the event such agreements were terminated;
•risks associated with unanticipated problems at, or downtime effecting, our facilities and those operated by third parties on which we rely and, unexpected changes in our anticipated capital expenditures resulting from unforeseen required maintenance, repairs, or upgrades;
•risks associated with our hedging activities, or our failure to hedge production;
•risks associated with our outstanding 6.25% Convertible Senior Notes due 2027 (the “Convertible Senior Note”), including amounts owed, conversion rights associated therewith, dilution caused thereby, redemption obligations associated therewith and our ability to repay such facilities and amounts due thereon when due;
•risks associated with our outstanding Term Loan due April 1, 2025 currently bearing interest 17.25% per annum, including amounts owed, our ability to repay such facilities and amounts due thereon when due, and as a result, our ability to continue as a going concern;
•risks associated with ongoing capital projects at the Mobile Refinery, including the timing thereof, costs associated therewith, and cost over runs;
•the level of competition in our industry and our ability to compete;
•decreases in global demand for, and the price of oil, the supply and demand for oil and used oil, as well as used oil feed stocks and the price of oil and the feedstocks we use in our operations, process and sell;
•the availability of crude oil and used oil feedstocks;
•the outcome of natural disasters, hurricanes, floods, war, terrorist attacks, fires and other events negatively impacting our facilities and operations;
•the loss of key personnel or failure to attract, integrate and retain additional personnel;
•our ability to protect our intellectual property and not infringe on others’ intellectual property;
•our ability to maintain supplier relationships and obtain adequate supplies of crude oil and other feedstocks;
•our ability to produce our products at competitive rates and the impact of competitive services and products;
•our ability to execute our business strategy in a very competitive environment;
•trends in, and the market for, the price of oil and gas and alternative energy sources and, our ability to respond to changes in our industry;
•our ability to maintain our relationships with Shell, Macquarie, and Idemitsu;
•potential future litigation, judgments and settlements;
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•risk of increased regulation of our operations and products and rules and regulations making our operations more costly or restrictive and changes in environmental and other laws and regulations and risks associated with such laws and regulations;
•economic downturns and recessions both in the United States and globally, increased inflation and interest rates;
•negative publicity and public opposition to our operations, disruptions in the infrastructure that we and our partners rely on;
•an inability to identify attractive acquisition opportunities and successfully negotiate acquisition terms, our ability to complete acquisitions, and our ability to effectively integrate acquired assets, companies, employees or businesses, and liabilities associated with acquired companies, assets or businesses;
•our ability to effectively manage our growth and scale our operations;
•our ability to maintain insurance, the costs of required insurance, our lack of insurance, or claims not covered by our insurance;
•our lack of effective disclosure controls and procedures and internal control over financial reporting;
•loss of our ability to use net operating loss carry-forwards;
•improvements in alternative energy sources and technologies;
•accidents, equipment failures or mechanical problems which may occur; operational hazards and unforeseen interruptions for which we may not be adequately insured; the threat and impact of terrorist attacks, cyber-attacks or similar hostilities, on our facilities, any one of which may adversely impact our operations;
•risks of downturns in the U.S. and global economies, changes in inflation or interest rates, and/or the ongoing conflicts in Ukraine and Israel;
•our ability to meet earnings guidance;
•anti-take-over rights, limits on liability of our officers and directors and indemnification rights and other terms of our governing documents;
•the volatile nature of the market for our common stock and our ability to maintain the listing of our common stock on The Nasdaq Capital Market; and
•dilution caused by new equity offerings, the exercise of warrants and/or the conversion of outstanding convertible notes.
Risk Factors
There have been no material changes from the risk factors previously disclosed in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, filed with the Commission on March 7, 2024 (the “Form 10-K”), under the heading “Risk Factors”, except as discussed below, and investors should review the risks provided in the Form 10-K and below, prior to making an investment in the Company. The business, financial condition and operating results of the Company can be affected by a number of factors, whether currently known or unknown, including but not limited to those described in the Form 10-K for the year ended December 31, 2023, under “Risk Factors” and below, any one or more of which could, directly or indirectly, cause the Company’s actual financial condition and operating results to vary materially from past, or from anticipated future, financial condition and operating results. Any of these factors, in whole or in part, could materially and adversely affect the Company’s business, financial condition, operating results and stock price.
Unanticipated problems or delays, or increases in costs, in connection with the ongoing capital project at the Mobile Refinery, or failures to obtain economic returns thereon, may harm our business and viability.
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We are in the process of completing phase 2 of a capital project designed to modify the Mobile Refinery’s hydrocracking unit to produce renewable diesel fuel on a standalone basis (the “Conversion”). The occurrence of significant unforeseen conditions or events in connection with the Conversion may make the Conversion more expensive, prevent us from completing the Conversion, delay the completion of the Conversion or require us to reexamine our business model. Additionally, such renewable diesel operations may not end up generating revenues and/or returns sufficient to make the Conversion and/or the operation of the renewable diesel unit commercially reasonable. Any change to our current business model or plans or management’s evaluation of the viability of the Conversion or timing associated therewith may adversely affect our business, relationships and agreements. Construction costs for the Conversion may also increase to a level that would make such Conversion too expensive to complete or unprofitable to operate, due to increases in material, labor, inflation, changing commodity pricing, operational expenses or otherwise. Contractors, engineering firms, construction firms and equipment suppliers also receive requests and orders from other companies and, therefore, we may not be able to secure their services or products on a timely basis or on acceptable financial terms. We may suffer significant delays or cost overruns as a result of a variety of factors, such as increases in the prices of raw materials, shortages of workers or materials, transportation constraints, adverse weather, equipment failures, fires, damage to or destruction of property and equipment, environmental damage, unforeseen difficulties or labor issues, or issues associated with planned capital projects, including cost overruns and unforeseen delays, and have already delayed the completion of the project once due to supply constraints, any of which could prevent us from timely completing the Conversion. Any of the above may result in a material adverse change to our financial results and cash flows. In the event the Company determines that the renewable diesel unit is unprofitable to operate, we may be unable to recoup the costs of the Conversion, and may face liabilities in the event we terminate, or unable to fulfil, material agreements associated therewith.
We anticipate that we will need to raise additional capital in the future to satisfy outstanding liabilities and our ability to obtain the necessary funding is uncertain, which raises substantial doubt about our ability to continue as a going concern.
We will need to raise additional funding or refinance our Term Loan in the future, which we owe $196 million under as of the date of this filing, and which is due on April 1, 2025. We may also need to raise additional funding to meet the requirements of the terms and conditions of our outstanding Convertible Senior Notes, including to pay interest and principal thereon, we anticipate needing to raise additional funding in the future to repay the Term Loan, and/or we may need to raise additional funding in the future to support our operations, complete capital projects, complete acquisitions and grow our operations. Such funds may not be available when needed or may not be available on favorable terms. If we raise additional funds in the future, by issuing equity securities, dilution to existing stockholders will result, and such securities may have rights, preferences and privileges senior to those of our common stock. If funding is insufficient at any time in the future and we are unable to generate sufficient revenue from new business arrangements, to repay our outstanding debts and/or redeem our preferred stock (pursuant to their terms), complete planned acquisitions or operations, our results of operations and the value of our securities could be adversely affected. Future funding may not be available on favorable terms, if at all. The terms of any new credit or debt agreement we enter into in the future to refinance or repay the Term Loan may be on less favorable terms, require additional, or more, restrictive covenants, and may further restrict our ability to operate.
As of March 31, 2024, the Company has evaluated its ability to continue as a going concern. Management has considered various factors, including historical operating results, liquidity, financial condition, and other relevant conditions and events. Based on this evaluation, management has determined that there is substantial doubt about the Company’s ability to continue as a going concern within one year of the financial statement issuance date primarily due to the Term Loan maturing on April 1, 2025. Management’s plans to mitigate the going concern risk include current efforts to refinance the debt of the Company with a new lender group, and the various efforts underway to reduce and minimize costs throughout the organization. In addition, the Company believes it has the ability, if necessary, to raise additional capital through the capital equity markets. However, there can be no assurance that these plans will be successful.
The financial statements included herein do not include any adjustments that might result from the outcome of this uncertainty. Investors and other users of the financial statements are encouraged to consider this information when assessing the Company's financial position and prospects.
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Item 2. Recent Sales of Unregistered Securities
There have been no sales of unregistered securities during the quarter ended March 31, 2024, and from the period from April 1, 2024, to the filing date of this report.
Use of Proceeds from Sale of Registered Securities
None.
Purchases of Equity Securities by the Issuer and Affiliate Purchasers
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information.
(c) Rule 10b5-1 Trading Plans. Our directors and executive officers may from time to time enter into plans or other arrangements for the purchase or sale of our shares that are intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or may represent a non-Rule 10b5-1 trading arrangement under the Exchange Act. During the quarter ended March 31, 2024, none of the Company’s directors or officers (as defined in Rule 16a-1(f)) adopted or terminated any contract, instruction or written plan for the purchase or sale of Company securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any “non-Rule 10b5-1 trading arrangement.”
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Item 6. Exhibits
The following exhibits are filed herewith or incorporated by reference herein:
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| Incorporated by Reference | ||||||||||||||||||||||||||||||||||||||
| Exhibit Number | Description of Exhibit | Filed or Furnished Herewith | Form | Exhibit | Filing Date/Period End Date | File No. | ||||||||||||||||||||||||||||||||
| 3.1 | 8-K | 3.1 | 2/9/2024 | 001-11476 | ||||||||||||||||||||||||||||||||||
| 4.1 | 8-K | 4.1 | 1/2/2024 | 001-11476 | ||||||||||||||||||||||||||||||||||
| 4.2 | 8-K | 4.2 | 1/2/2024 | 001-11476 | ||||||||||||||||||||||||||||||||||
| 4.3 | 8-K | 4.3 | 1/2/2024 | 001-11476 | ||||||||||||||||||||||||||||||||||
| 10.1% | 8-K | 10.1 | 1/2/2024 | 001-11476 | ||||||||||||||||||||||||||||||||||
| 10.2 | 8-K | 10.2 | 1/2/2024 | 001-11476 | ||||||||||||||||||||||||||||||||||
| 10.3 % | Limited Consent dated March 28, 2024, by and among Vertex Refining Alabama LLC, as borrower, Vertex Energy Inc., certain direct and indirect subsidiaries of Vertex Energy Inc., the lenders party thereto, and Cantor Fitzgerald Securities, as administrative agent and collateral agent for the lenders | X | ||||||||||||||||||||||||||||||||||||
| 10.4 % | Limited Consent dated March 28, 2024, by and among Vertex Refining Alabama LLC, as borrower, Vertex Energy Inc., certain direct and indirect subsidiaries of Vertex Energy Inc., the lenders party thereto, and Cantor Fitzgerald Securities, as administrative agent and collateral agent for the lenders | X | ||||||||||||||||||||||||||||||||||||
| 31.1 | X | |||||||||||||||||||||||||||||||||||||
| 31.2 | X | |||||||||||||||||||||||||||||||||||||
| 32.1 | X | |||||||||||||||||||||||||||||||||||||
| 32.2 | X | |||||||||||||||||||||||||||||||||||||
| 101.INS | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document* | X | ||||||||||||||||||||||||||||||||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document* | X | ||||||||||||||||||||||||||||||||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document* | X | ||||||||||||||||||||||||||||||||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document* | X | ||||||||||||||||||||||||||||||||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document* | X | ||||||||||||||||||||||||||||||||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document* | X | ||||||||||||||||||||||||||||||||||||
| 104 | Inline XBRL for the cover page of this Annual Report on Form 10-K, included in the Exhibit 101 Inline XBRL Document Set* | X | ||||||||||||||||||||||||||||||||||||
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* Filed herewith.
** Furnished herewith.
% Certain schedules, annexes and similar attachments have been omitted pursuant to Item 601(a)(5) of Regulation S-K. A copy of any omitted schedule or exhibit will be furnished supplementally to the Securities and Exchange Commission upon request; provided, however that Vertex Energy, Inc. may request confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, for any schedule or exhibit so furnished.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, hereunto duly authorized.
| VERTEX ENERGY, INC. | |||||
| Date: May 9, 2024 | By: /s/ Benjamin P. Cowart | ||||
| Benjamin P. Cowart | |||||
| Chief Executive Officer | |||||
| (Principal Executive Officer) | |||||
| Date: May 9, 2024 | By: /s/ Chris Carlson | ||||
| Chris Carlson | |||||
| Chief Financial Officer | |||||
| (Principal Financial/Accounting Officer) | |||||
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