UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal quarter ended March 31,June 30, 2022
☐ 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)
———————
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Nevada | 94-3439569 |
(State or other jurisdiction of | (I.R.S. Employer Identification No.) |
incorporation or organization) | |
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1331 Gemini Street, Suite 250 77058
Houston, Texas
(Address of principal executive offices) (Zip Code)
866-660-8156
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, $0.001 Par Value Per Share | VTNR | The NASDAQ Stock Market LLC |
| (Nasdaq Capital Market) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | |
Large accelerated filer | ☐ | | Accelerated filer | ☒ |
Non-accelerated filer | ☐ | | Smaller reporting company | ☐ |
| | | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.
Yes ☐ No ý
State the number of shares of the issuer’s common stock outstanding, as of the latest practicable date:64,580,984 75,608,826 shares of common stock are issued and outstanding as of May 9,August 8, 2022.
TABLE OF CONTENTS
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| | PART I | |
Item 1. | | | |
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Item 2 | | | |
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Item 3. | | | |
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Item 4. | | | |
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| | PART II | |
Item 1. | | | |
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Item 1A. | | | |
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Item 2. | | | |
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Item 3. | | | |
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Item 4. | | | |
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Item 5. | | | |
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Item 6. | | | |
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 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, 2021, as filed with the SEC on March 14, 2022 (under the heading “Risk Factors” and in other parts of that report), which factors include:
•our need for additional funding and the availability of and terms of such funding, our ability to pay amounts due on our current indebtedness, covenants of such indebtedness and security interests in connection therewith;funding;
•risks associated with our outstanding indebtedness, including our outstanding senior convertible notes,Convertible Senior Notes, including amounts owed, restrictive covenants and security interests in connection therewith, and our ability to repay such debts and amounts due thereon (including interest) when due, and mandatory and special redemption provisions thereof, and conversion rights associated therewith, including dilution caused thereby (in connection with the senior convertible notes)Convertible Senior Notes);
•restrictions, requirements and covenants in our loan and funding agreements;
•security interests, guarantees and pledges associated with our outstanding Loan and Security Agreement and Supply and Offtake Agreement, and risks associated with such agreements in general;
•risks related to combining our operations with the recently acquired Mobile, Alabama refinery;
•risks associated with the planned capital project currently in process at our recently acquired Mobile, Alabama refinery, including costs, timing, delays and unanticipated problems associated therewith;
•risks associated with the planned acquisition of 100% of Heartland SPV (as defined below), including funds required in connection therewith and our ability to raise such funds on reasonable terms, if at all;
•health, safety, security and environment risks;
•risks associated with our outstanding preferred stock, including liquidation preferences in connection therewith;
•risks related to combining our operations with the recently acquired Mobile, Alabama refinery;
•risks associated with a planned capital project associated with the Mobile, Alabama refinery, including the timing thereof, costs associated therewith and our ability to generate revenues while such project is pending;
•risks associated with an offtake agreement which will only become effective upon the occurrence of certain events, including the completion of the capital project at the Mobile, Alabama refinery, which may not be completed timely;
•the level of competition in our industry and our ability to compete;
•our ability to respond to changes in our 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 relationshiprelationships with Bunker One (USA) Inc;Inc, Macquarie Energy North America Trading Inc., and Shell;
•the impact of competitive services and products;
•our ability to complete and integrate acquisitions;
•our ability to complete future acquisitions;
•our ability to maintain insurance;
•potential future litigation, judgments and settlements;
•rules and regulations making our operations more costly or restrictive;
•changes in environmental and other laws and regulations and risks associated with such laws and regulations;
•economic downturns both in the United States and globally;
•risk of increased regulation of our operations and products;
•negative publicity and public opposition to our operations;
•disruptions in the infrastructure that we and our partners rely on;
•an inability to identify attractive acquisition opportunities and successfully negotiate acquisition terms;
•our ability to effectively integrate acquired assets, companies, employees or businesses;
•liabilities associated with acquired companies, assets or businesses;
•interruptions at our facilities;
•losses under derivative and hedging contracts;
•unexpected changes in our anticipated capital expenditures resulting from unforeseen required maintenance, repairs, or upgrades;
•our ability to acquire and construct new facilities;
•prohibitions on borrowing and other covenants of our debt facilities;
•our ability to effectively manage our growth;
•decreases in global demand for, and the price of, oil, due to COVID-19, state, federal and foreign responses thereto;
•our ability to acquire sufficient amounts of used oil feedstock through our collection routes, to produce finished products, and in the absence of such internally collected feedstocks, our ability to acquire third-party feedstocks on commercially reasonable terms;
•repayment of and covenants in our current and future debt facilities;
•the lack of capital available on acceptable terms to finance our continued growth; and
•other risk factors included under “Risk Factors” in our latest Annual Report on Form 10-K and set forth below under “Risk Factors”. You should read the matters described in, and incorporated by reference in, “Risk Factors” and the other cautionary statements made in this Report, and incorporated by reference herein, as being applicable to all related forward-looking statements wherever they appear in this Report. We cannot assure you that the forward-looking statements in this Report will prove to be accurate and therefore prospective investors are encouraged not to place undue reliance on forward-looking statements. 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.
Our fiscal year ends on December 31st. Interim results are presented on a quarterly basis for the quarters ended March 31st, June 30th, and September 30th, the first quarter, second quarter and third quarter, respectively, with the quarter ending December 31st being referenced herein as our fourth quarter. Fiscal 2022 means the year ended December 31, 2022; fiscal 2021 means the year ended December 31, 2021, whereasand fiscal 2020 means the year ended December 31, 2020.
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, 2022 | | December 31, 2021 | | June 30, 2022 | | December 31, 2021 |
ASSETS | ASSETS | | | | ASSETS | | | |
Current assets | Current assets | | | | Current assets | | | |
Cash and cash equivalents | Cash and cash equivalents | $ | 24,050,252 | | | $ | 36,129,941 | | Cash and cash equivalents | $ | 97,914 | | | $ | 36,130 | |
Restricted cash | Restricted cash | 100,496,998 | | | 100,496,998 | | Restricted cash | 100 | | | 100,497 | |
Accounts receivable, net | Accounts receivable, net | 5,957,642 | | | 5,296,867 | | Accounts receivable, net | 90,854 | | | 5,297 | |
| Inventory | Inventory | 13,052,840 | | | 3,735,878 | | Inventory | 201,752 | | | 3,736 | |
Derivative commodity asset | Derivative commodity asset | 363,590 | | | 95,980 | | Derivative commodity asset | — | | | 96 | |
Prepaid expenses and other current assets | Prepaid expenses and other current assets | 6,719,497 | | | 4,279,732 | | Prepaid expenses and other current assets | 36,627 | | | 4,280 | |
Assets held for sale, current | Assets held for sale, current | 90,474,740 | | | 84,116,152 | | Assets held for sale, current | 92,494 | | | 84,116 | |
Total current assets | Total current assets | 241,115,559 | | | 234,151,548 | | Total current assets | 519,741 | | | 234,152 | |
| | Fixed assets, at cost | Fixed assets, at cost | 13,773,860 | | | 13,811,835 | | Fixed assets, at cost | 116,722 | | | 13,811 | |
Less accumulated depreciation | Less accumulated depreciation | (2,113,315) | | | (2,045,241) | | Less accumulated depreciation | (4,475) | | | (2,045) | |
Fixed assets, net | Fixed assets, net | 11,660,545 | | | 11,766,594 | | Fixed assets, net | 112,247 | | | 11,766 | |
| Finance lease right-of-use assets | | Finance lease right-of-use assets | 44,373 | | | — | |
Operating lease right-of use assets | Operating lease right-of use assets | 4,891,254 | | | 5,011,454 | | Operating lease right-of use assets | 4,768 | | | 5,011 | |
Intangible assets, net | Intangible assets, net | 331,965 | | | 358,881 | | Intangible assets, net | 8,375 | | | 359 | |
| Other assets | Other assets | 22,498,249 | | | 14,771,642 | | Other assets | 1,159 | | | 14,772 | |
| TOTAL ASSETS | TOTAL ASSETS | $ | 280,497,572 | | | $ | 266,060,119 | | TOTAL ASSETS | $ | 690,663 | | | $ | 266,060 | |
| LIABILITIES, TEMPORARY EQUITY, AND EQUITY | LIABILITIES, TEMPORARY EQUITY, AND EQUITY | | | | LIABILITIES, TEMPORARY EQUITY, AND EQUITY | | | |
Current liabilities | Current liabilities | | | | Current liabilities | | | |
Accounts payable | Accounts payable | $ | 12,023,382 | | | $ | 4,216,275 | | Accounts payable | $ | 50,652 | | | $ | 4,216 | |
Accrued expenses | Accrued expenses | 2,864,643 | | | 3,617,902 | | Accrued expenses | 30,560 | | | 3,618 | |
| Finance lease liability-current | Finance lease liability-current | 263,065 | | | 302,166 | | Finance lease liability-current | 652 | | | 302 | |
Operating lease liability-current | Operating lease liability-current | 959,573 | | | 959,573 | | Operating lease liability-current | 953 | | | 960 | |
Current portion of long-term debt | 1,047,081 | | | 2,413,295 | | |
| Current portion of long-term debt, net | | Current portion of long-term debt, net | 1,927 | | | 2,413 | |
Obligations under inventory financing agreements, net | | Obligations under inventory financing agreements, net | 172,857 | | | — | |
Derivative commodity liability | | Derivative commodity liability | 46,536 | | | — | |
Liabilities held for sale, current | Liabilities held for sale, current | 41,696,760 | | | 37,644,312 | | Liabilities held for sale, current | 35,507 | | | 37,645 | |
Total current liabilities | Total current liabilities | 58,854,504 | | | 49,153,523 | | Total current liabilities | 339,644 | | | 49,154 | |
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Long-term debt | 104,777 | | | 114,480 | | |
| Long-term debt, net | | Long-term debt, net | 135,332 | | | 114 | |
Finance lease liability-long-term | | Finance lease liability-long-term | 44,640 | | | — | |
Convertible senior unsecured note 2027, net | Convertible senior unsecured note 2027, net | 65,786,685 | | | 64,015,929 | | Convertible senior unsecured note 2027, net | 41,543 | | | 64,016 | |
Operating lease liability-long-term | Operating lease liability-long-term | 3,931,681 | | | 4,051,881 | | Operating lease liability-long-term | 3,816 | | | 4,052 | |
| Derivative warrant liability | Derivative warrant liability | — | | | 75,210,525 | | Derivative warrant liability | 26,615 | | | 75,211 | |
Other liabilities | | Other liabilities | 1,378 | | | — | |
Total liabilities | Total liabilities | 128,677,647 | | | 192,546,338 | | Total liabilities | 592,968 | | | 192,547 | |
| COMMITMENTS AND CONTINGENCIES (Note 3) | COMMITMENTS AND CONTINGENCIES (Note 3) | — | | | — | | COMMITMENTS AND CONTINGENCIES (Note 3) | — | | | — | |
|
| | | | | | | | | | | | | June 30, 2022 | | December 31, 2021 |
| | March 31, 2022 | | December 31, 2021 | |
TEMPORARY EQUITY | TEMPORARY EQUITY | | TEMPORARY EQUITY | |
| Redeemable non-controlling interest | Redeemable non-controlling interest | 47,636,617 | | | 43,446,684 | | Redeemable non-controlling interest | — | | | 43,447 | |
Total temporary equity | Total temporary equity | 47,636,617 | | | 43,446,684 | | Total temporary equity | — | | | 43,447 | |
EQUITY | EQUITY | | | | EQUITY | | | |
50,000,000 of total Preferred shares authorized: | 50,000,000 of total Preferred shares authorized: | | | | 50,000,000 of total Preferred shares authorized: | | | |
Series A Convertible Preferred Stock, $0.001 par value; 5,000,000 shares designated, 380,560 and 385,601 shares issued and outstanding at March 31, 2022 and December 31, 2021, with a liquidation preference of $567,034 and $574,545 at March 31, 2022 and December 31, 2021. | 381 | | | 386 | | |
Series A Convertible Preferred Stock, $0.001 par value; 5,000,000 shares designated, 0 and 385,601 shares issued and outstanding at June 30, 2022 and December 31, 2021, with a liquidation preference of $0 and $574,545 at June 30, 2022 and December 31, 2021. | | Series A Convertible Preferred Stock, $0.001 par value; 5,000,000 shares designated, 0 and 385,601 shares issued and outstanding at June 30, 2022 and December 31, 2021, with a liquidation preference of $0 and $574,545 at June 30, 2022 and December 31, 2021. | — | | | — | |
| Series C Convertible Preferred Stock, $0.001 par value; 44,000 shares designated, zero shares issued or outstanding. | Series C Convertible Preferred Stock, $0.001 par value; 44,000 shares designated, zero shares issued or outstanding. | — | | | — | | Series C Convertible Preferred Stock, $0.001 par value; 44,000 shares designated, zero shares issued or outstanding. | — | | | — | |
| Common stock, $0.001 par value per share; 750,000,000 shares authorized; 64,465,734 and 63,287,965 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively. | 64,466 | | | 63,288 | | |
Common stock, $0.001 par value per share; 750,000,000 shares authorized; 75,509,002 and 63,287,965 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively. | | Common stock, $0.001 par value per share; 750,000,000 shares authorized; 75,509,002 and 63,287,965 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively. | 76 | | | 63 | |
Additional paid-in capital | Additional paid-in capital | 217,734,093 | | | 138,620,254 | | Additional paid-in capital | 278,455 | | | 138,620 | |
Accumulated deficit | Accumulated deficit | (115,582,890) | | | (110,614,035) | | Accumulated deficit | (182,588) | | | (110,614) | |
Total Vertex Energy, Inc. shareholders' equity | Total Vertex Energy, Inc. shareholders' equity | 102,216,050 | | | 28,069,893 | | Total Vertex Energy, Inc. shareholders' equity | 95,943 | | | 28,069 | |
Non-controlling interest | Non-controlling interest | 1,967,258 | | | 1,997,204 | | Non-controlling interest | 1,752 | | | 1,997 | |
Total equity | Total equity | 104,183,308 | | | 30,067,097 | | Total equity | 97,695 | | | 30,066 | |
TOTAL LIABILITIES, TEMPORARY EQUITY, AND EQUITY | TOTAL LIABILITIES, TEMPORARY EQUITY, AND EQUITY | $ | 280,497,572 | | | $ | 266,060,119 | | TOTAL LIABILITIES, TEMPORARY EQUITY, AND EQUITY | $ | 690,663 | | | $ | 266,060 | |
See accompanying notes to the consolidated financial statements.
VERTEX ENERGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(UNAUDITED)
| | | | Three Months Ended March 31, | | | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | | 2022 | | 2021 | | | | 2022 | | 2021 | | 2022 | | 2021 |
Revenues | Revenues | | $ | 40,216,796 | | | $ | 25,045,243 | | | Revenues | | $ | 991,839 | | | $ | 30,228 | | | $ | 1,032,056 | | | $ | 55,273 | |
Cost of revenues (exclusive of depreciation and amortization shown separately below) | Cost of revenues (exclusive of depreciation and amortization shown separately below) | | 38,565,484 | | | 22,808,703 | | | Cost of revenues (exclusive of depreciation and amortization shown separately below) | | 984,442 | | | 28,041 | | | 1,023,008 | | | 50,850 | |
Depreciation and amortization attributable to costs of revenues | Depreciation and amortization attributable to costs of revenues | | 114,053 | | | 112,497 | | | Depreciation and amortization attributable to costs of revenues | | 3,122 | | | 116 | | | 3,236 | | | 228 | |
Gross profit | Gross profit | | 1,537,259 | | | 2,124,043 | | | Gross profit | | 4,275 | | | 2,071 | | | 5,812 | | | 4,195 | |
| Operating expenses: | Operating expenses: | | | Operating expenses: | |
Selling, general and administrative expenses | Selling, general and administrative expenses | | 8,782,395 | | | 2,858,062 | | | Selling, general and administrative expenses | | 36,641 | | | 4,177 | | | 45,423 | | | 7,035 | |
Depreciation and amortization attributable to operating expenses | Depreciation and amortization attributable to operating expenses | | 26,916 | | | 26,916 | | | Depreciation and amortization attributable to operating expenses | | 763 | | | 27 | | | 790 | | | 54 | |
| | Total operating expenses | Total operating expenses | | 8,809,311 | | | 2,884,978 | | | Total operating expenses | | 37,404 | | | 4,204 | | | 46,213 | | | 7,089 | |
| Loss from operations | Loss from operations | | (7,272,052) | | | (760,935) | | | Loss from operations | | (33,129) | | | (2,133) | | | (40,401) | | | (2,894) | |
| Other income (expense): | Other income (expense): | | | | | | Other income (expense): | | | | | | | | |
| Interest income | | Interest income | | 18 | | | — | | | 18 | | | — | |
Other income | | Other income | | 152 | | | 4,222 | | | 625 | | | 4,223 | |
| Other income | | 414,972 | | | — | | | |
Gain on sale of assets | | 57,402 | | | 1,424 | | | |
Loss on change in value of derivative warrant liability | Loss on change in value of derivative warrant liability | | (3,578,947) | | | (1,780,203) | | | Loss on change in value of derivative warrant liability | | (945) | | | (21,508) | | | (4,524) | | | (23,288) | |
| Interest expense | Interest expense | | (4,229,884) | | | (112,142) | | | Interest expense | | (47,722) | | | (139) | | | (51,952) | | | (251) | |
Total other expense | Total other expense | | (7,336,457) | | | (1,890,921) | | | Total other expense | | (48,497) | | | (17,425) | | | (55,833) | | | (19,316) | |
Loss from continuing operations before income tax | Loss from continuing operations before income tax | | (14,608,509) | | | (2,651,856) | | | Loss from continuing operations before income tax | | (81,626) | | | (19,558) | | | (96,234) | | | (22,210) | |
Income tax benefit (expense) | Income tax benefit (expense) | | — | | | — | | | Income tax benefit (expense) | | — | | | — | | | — | | | — | |
Loss from continuing operations | Loss from continuing operations | | (14,608,509) | | | (2,651,856) | | | Loss from continuing operations | | (81,626) | | | (19,558) | | | (96,234) | | | (22,210) | |
Income from discontinued operations, net of tax | | 13,799,642 | | | 5,617,194 | | | |
Net income (loss) | | (808,867) | | | 2,965,338 | | | |
Net income (loss) attributable to non-controlling interest and redeemable non-controlling interest from continuing operations | | (68,164) | | | 382,666 | | | |
Income from discontinued operations, net of tax (see note 16) | | Income from discontinued operations, net of tax (see note 16) | | 17,844 | | | 3,601 | | | 31,643 | | | 9,219 | |
Net loss | | Net loss | | (63,782) | | | (15,957) | | | (64,591) | | | (12,991) | |
Net income attributable to non-controlling interest and redeemable non-controlling interest from continuing operations | | Net income attributable to non-controlling interest and redeemable non-controlling interest from continuing operations | | 165 | | | 243 | | | 97 | | | 626 | |
Net income attributable to non-controlling interest and redeemable non-controlling interest from discontinued operations | Net income attributable to non-controlling interest and redeemable non-controlling interest from discontinued operations | | 3,806,753 | | | 1,608,303 | | | Net income attributable to non-controlling interest and redeemable non-controlling interest from discontinued operations | | 3,023 | | | 3,175 | | | 6,829 | | | 4,783 | |
Net income (loss) attributable to Vertex Energy, Inc. | | (4,547,456) | | | 974,369 | | | |
Net loss attributable to Vertex Energy, Inc. | | Net loss attributable to Vertex Energy, Inc. | | (66,970) | | | (19,375) | | | (71,517) | | | (18,400) | |
| Accretion of redeemable noncontrolling interest to redemption value from continued operations | Accretion of redeemable noncontrolling interest to redemption value from continued operations | | (421,399) | | | (373,748) | | | Accretion of redeemable noncontrolling interest to redemption value from continued operations | | (6) | | | (387) | | | (428) | | | (762) | |
Accretion of discount on Series B and B1 Preferred Stock | Accretion of discount on Series B and B1 Preferred Stock | | — | | | (223,727) | | | Accretion of discount on Series B and B1 Preferred Stock | | — | | | (284) | | | — | | | (507) | |
Dividends on Series B and B1 Preferred Stock | Dividends on Series B and B1 Preferred Stock | | — | | | 258,138 | | | Dividends on Series B and B1 Preferred Stock | | — | | | — | | | — | | | 258 | |
| Net loss available to shareholders from continuing operations | | (14,961,744) | | | (3,373,859) | | | |
Net income available to shareholders from discontinued operations, net of tax | | 9,992,889 | | | 4,008,891 | | | |
Net income (loss) available to common shareholders | | $ | (4,968,855) | | | $ | 635,032 | | | |
| Net loss attributable to shareholders from continuing operations | | Net loss attributable to shareholders from continuing operations | | (81,797) | | | (20,472) | | | (96,759) | | | (23,847) | |
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Basic income (loss) per common share | | | | | | | | | | | | |
Continuing operations | | $ | (0.24) | | | $ | (0.07) | | | | | | | | | |
Discontinued operations, net of tax | | $ | 0.16 | | | $ | 0.08 | | | | | | | | | |
Basic income (loss) per common share | | $ | (0.08) | | | $ | 0.01 | | | | | | | | | |
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Diluted income (loss) per common share | | | | | | | | | | | | |
Continuing operations | | $ | (0.24) | | | $ | (0.07) | | | | | | | | | |
Discontinued operations, net of tax | | $ | 0.16 | | | $ | 0.08 | | | | | | | | | |
Diluted income (loss) per common share | | $ | (0.08) | | | $ | 0.01 | | | | | | | | | |
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Shares used in computing earnings per share | | | | | | | | | | | | |
Basic | | 63,372,005 | | | 47,709,450 | | | | | | | | | |
Diluted | | 63,372,005 | | | 49,006,195 | | | | | | | | | |
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Net income attributable to shareholders from discontinued operations, net of tax | | 14,821 | | | 426 | | | 24,814 | | | 4,436 | |
Net loss attributable to common shareholders | | $ | (66,976) | | | $ | (20,046) | | | $ | (71,945) | | | $ | (19,411) | |
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Basic income (loss) per common share | | | | | | | | |
Continuing operations | | $ | (1.20) | | | $ | (0.39) | | | $ | (1.47) | | | $ | (0.48) | |
Discontinued operations, net of tax | | 0.22 | | | 0.01 | | | 0.38 | | | 0.09 | |
Basic income (loss) per common share | | $ | (0.98) | | | $ | (0.38) | | | $ | (1.09) | | | $ | (0.39) | |
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Diluted income (loss) per common share | | | | | | | | |
Continuing operations | | $ | (1.20) | | | $ | (0.39) | | | $ | (1.47) | | | $ | (0.48) | |
Discontinued operations, net of tax | | 0.22 | | | 0.01 | | | 0.38 | | | 0.09 | |
Diluted income (loss) per common share | | $ | (0.98) | | | $ | (0.38) | | | $ | (1.09) | | | $ | (0.39) | |
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Shares used in computing earnings per share | | | | | | | | |
Basic | | 67,923 | | | 52,683 | | | 65,660 | | | 50,210 | |
Diluted | | 67,923 | | | 52,683 | | | 65,660 | | | 50,210 | |
See accompanying notes to the consolidated financial statements.
VERTEX ENERGY, INC.
CONSOLIDATED STATEMENTS OF EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021(in thousands, except par value)
(UNAUDITED)
| Three Months Ended March 31, 2022 | |
Six Months Ended June 30, 2022 | | Six Months Ended June 30, 2022 |
| | Common Stock | | Series A Preferred | | Series C Preferred | | | Common Stock | | Series A Preferred | | Series C Preferred | |
| | Shares | | $0.001 Par | | Shares | | $0.001 Par | | Shares | | $0.001 Par | | Additional Paid-In Capital | | Retained Earnings | | Non-controlling Interest | | Total Equity | | Shares | | $0.001 Par | | Shares | | $0.001 Par | | Shares | | $0.001 Par | | Additional Paid-In Capital | | Retained Earnings | | Non-controlling Interest | | Total Equity |
Balance on January 1, 2022 | Balance on January 1, 2022 | 63,287,965 | | | $ | 63,288 | | | 385,601 | | | $ | 386 | | | — | | | $ | — | | | $ | 138,620,254 | | | $ | (110,614,035) | | | $ | 1,997,204 | | | $ | 30,067,097 | | Balance on January 1, 2022 | 63,288 | | | $ | 63 | | | 386 | | | $ | — | | | — | | | $ | — | | | $ | 138,620 | | | $ | (110,614) | | | $ | 1,997 | | | $ | 30,066 | |
Exercise of options | Exercise of options | 60,000 | | | 60 | | | — | | | — | | | — | | | — | | | 75,540 | | | — | | | — | | | 75,600 | | Exercise of options | 60 | | | — | | | — | | | — | | | — | | | — | | | 76 | | | — | | | — | | | 76 | |
Exercise of warrants | Exercise of warrants | 1,112,728 | | | 1,113 | | | — | | | — | | | — | | | — | | | (1,113) | | | — | | | — | | | — | | Exercise of warrants | 1,113 | | | 1 | | | — | | | — | | | — | | | — | | | (1) | | | — | | | — | | | — | |
Share based compensation expense | Share based compensation expense | — | | | — | | | — | | | — | | | — | | | — | | | 249,940 | | | — | | | — | | | 249,940 | | Share based compensation expense | — | | | — | | | — | | | — | | | — | | | — | | | 250 | | | — | | | — | | | 250 | |
Conversion of Series A Preferred stock to common | Conversion of Series A Preferred stock to common | 5,041 | | | 5 | | | (5,041) | | | (5) | | | — | | | — | | | — | | | — | | | — | | | — | | Conversion of Series A Preferred stock to common | 5 | | | — | | | (5) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Reclassification of derivative liabilities | Reclassification of derivative liabilities | — | | | — | | | — | | | — | | | — | | | — | | | 78,789,472 | | | — | | | — | | | 78,789,472 | | Reclassification of derivative liabilities | — | | | — | | | — | | | — | | | — | | | — | | | 78,789 | | | — | | | — | | | 78,789 | |
Accretion of redeemable non-controlling interest to redemption value | Accretion of redeemable non-controlling interest to redemption value | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (421,399) | | | — | | | (421,399) | | Accretion of redeemable non-controlling interest to redemption value | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (422) | | | — | | | (422) | |
Net income (loss) | Net income (loss) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (4,547,456) | | | 3,738,589 | | | (808,867) | | Net income (loss) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (4,547) | | | 3,739 | | | (808) | |
Less: amount attributable to redeemable non-controlling interest | Less: amount attributable to redeemable non-controlling interest | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (3,768,535) | | | (3,768,535) | | Less: amount attributable to redeemable non-controlling interest | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (3,769) | | | (3,769) | |
Balance on March 31, 2022 | Balance on March 31, 2022 | 64,465,734 | | | $ | 64,466 | | | 380,560 | | | $ | 381 | | | — | | | $ | — | | | $ | 217,734,093 | | | $ | (115,582,890) | | | $ | 1,967,258 | | | $ | 104,183,308 | | Balance on March 31, 2022 | 64,466 | | | 64 | | | 381 | | | — | | | — | | | — | | | 217,734 | | | (115,583) | | | 1,967 | | | 104,182 | |
Exercise of options to common | | Exercise of options to common | 498 | | | 1 | | | — | | | — | | | — | | | — | | | 553 | | | — | | | — | | | 554 | |
Exercise of options to common- unissued | | Exercise of options to common- unissued | — | | | — | | | — | | | — | | | — | | | — | | | 3 | | | — | | | — | | | 3 | |
Distribution to noncontrolling shareholder | | Distribution to noncontrolling shareholder | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (380) | | | (380) | |
Adjustment of redeemable non controlling interest | | Adjustment of redeemable non controlling interest | — | | | — | | | — | | | — | | | — | | | — | | | 29 | | | (29) | | | — | | | — | |
Conversion of Convertible Senior Notes to common | | Conversion of Convertible Senior Notes to common | 10,164 | | | 10 | | | — | | | — | | | — | | | — | | | 59,812 | | | — | | | — | | | 59,822 | |
Share based compensation expense | | Share based compensation expense | — | | | — | | | — | | | — | | | — | | | — | | | 324 | | | — | | | — | | | 324 | |
Conversion of Series A Preferred stock to common | | Conversion of Series A Preferred stock to common | 381 | | | 1 | | | (381) | | | — | | | — | | | — | | | — | | | — | | | — | | | 1 | |
Accretion of redeemable non-controlling interest to redemption value | | Accretion of redeemable non-controlling interest to redemption value | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (6) | | | — | | | (6) | |
Net loss | | Net loss | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (66,970) | | | 3,188 | | | (63,782) | |
Less: amount attributable to redeemable non-controlling interest | | Less: amount attributable to redeemable non-controlling interest | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (3,023) | | | (3,023) | |
Balance on June 30, 2022 | | Balance on June 30, 2022 | 75,509 | | | $ | 76 | | | — | | | $ | — | | | — | | | $ | — | | | $ | 278,455 | | | $ | (182,588) | | | $ | 1,752 | | | $ | 97,695 | |
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Three Months Ended March 31, 2021 |
| Common Stock | | Series A Preferred | | Series C Preferred | | | | | | | | |
| Shares | | $0.001 Par | | Shares | | $0.001 Par | | Shares | | $0.001 Par | | Additional Paid-In Capital | | Retained Earnings | | Non-controlling Interest | | Total Equity |
Balance on January 1, 2021 | 45,554,841 | | | $ | 45,555 | | | 419,859 | | | $ | 420 | | | — | | | $ | — | | | $ | 94,569,674 | | | $ | (90,008,778) | | | $ | 1,317,878 | | | $ | 5,924,749 | |
Exercise of options | 22,992 | | | 23 | | | — | | | — | | | — | | | — | | | (23) | | | — | | | — | | | — | |
Exercise of B1 warrants | 1,079,753 | | | 1,080 | | | — | | | — | | | — | | | — | | | 2,756,877 | | | — | | | — | | | 2,757,957 | |
Exchanges of Series B Preferred stock to common | 2,359,494 | | | 2,359 | | | — | | | — | | | — | | | — | | | 4,114,570 | | | 630,321 | | | — | | | 4,747,250 | |
Share based compensation expense | — | | | — | | | — | | | — | | | — | | | — | | | 150,514 | | | — | | | — | | | 150,514 | |
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Conversion of Series B Preferred stock to common | 638,224 | | | 638 | | | — | | | — | | | — | | | — | | | 1,977,856 | | | — | | | — | | | 1,978,494 | |
Conversion of Series B1 Preferred stock to common | 2,087,195 | | | 2,087 | | | — | | | — | | | — | | | — | | | 3,253,937 | | | — | | | — | | | 3,256,024 | |
Dividends on Series B and B1 | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (372,183) | | | — | | | (372,183) | |
Accretion of discount on Series B and B1 | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (223,727) | | | — | | | (223,727) | |
Accretion of redeemable non-controlling interest to redemption value | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (373,748) | | | — | | | (373,748) | |
Net income | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 974,369 | | | 1,990,969 | | | 2,965,338 | |
Less: amount attributable to redeemable non-controlling interest | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,542,402) | | | (1,542,402) | |
Balance on March 31, 2021 | 51,742,499 | | | $ | 51,742 | | | 419,859 | | | $ | 420 | | | — | | | $ | — | | | $ | 106,823,405 | | | $ | (89,373,746) | | | $ | 1,766,445 | | | $ | 19,268,266 | |
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See accompanying notes to the consolidated financial statements.
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Six Months Ended June 30, 2021 |
| Common Stock | | Series A Preferred | | Series C Preferred | | | | | | | | |
| Shares | | $0.001 Par | | Shares | | $0.001 Par | | Shares | | $0.001 Par | | Additional Paid-In Capital | | Retained Earnings | | Non-controlling Interest | | Total Equity |
Balance on January 1, 2021 | 45,555 | | | $ | 46 | | | 420 | | | $ | — | | | — | | | $ | — | | | $ | 94,570 | | | $ | (90,009) | | | $ | 1,318 | | | $ | 5,925 | |
Exercise of options | 23 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Exercise of B1 warrants | 1,080 | | | 1 | | | — | | | — | | | — | | | — | | | 2,757 | | | — | | | — | | | 2,758 | |
Exchanges of Series B Preferred stock to common | 2,359 | | | 2 | | | — | | | — | | | — | | | — | | | 4,114 | | | 630 | | | — | | | 4,746 | |
Share based compensation expense | — | | | — | | | — | | | — | | | — | | | — | | | 150 | | | — | | | — | | | 150 | |
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Conversion of Series B Preferred stock to common | 638 | | | 1 | | | — | | | — | | | — | | | — | | | 1,978 | | | — | | | — | | | 1,979 | |
Conversion of Series B1 Preferred stock to common | 2,087 | | | 2 | | | — | | | — | | | — | | | — | | | 3,254 | | | — | | | — | | | 3,256 | |
Dividends on Series B and B1 | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (372) | | | — | | | (372) | |
Accretion of discount on Series B and B1 | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (224) | | | — | | | (224) | |
Accretion of redeemable non-controlling interest to redemption value | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (373) | | | — | | | (373) | |
Net income | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 974 | | | 1,991 | | | 2,965 | |
Less: amount attributable to redeemable non-controlling interest | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,542) | | | (1,542) | |
Balance on March 31, 2021 | 51,742 | | | 52 | | | 420 | | | — | | | — | | | — | | | 106,823 | | | (89,374) | | | 1,767 | | | 19,268 | |
Exercise of options to common | 505 | | | — | | | — | | | — | | | — | | | — | | | 229 | | | — | | | — | | | 229 | |
Exercise of options to common- unissued | — | | | — | | | — | | | — | | | — | | | — | | | 475 | | | — | | | — | | | 475 | |
Leverage Lubricants contribution | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (13) | | | (13) | |
Exercise of B1 warrants | 157 | | | — | | | — | | | — | | | — | | | — | | | 1,634 | | | — | | | — | | | 1,634 | |
Exercise of B1 warrants-unissued | — | | | — | | | — | | | — | | | — | | | — | | | 1,186 | | | — | | | — | | | 1,186 | |
Share based compensation expense | — | | | — | | | — | | | — | | | — | | | — | | | 205 | | | — | | | — | | | 205 | |
Conversion of Series A Preferred stock to common | 28 | | | — | | | (28) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Conversion of Series B Preferred stock to common | 1,842 | | | 2 | | | — | | | — | | | — | | | — | | | 5,707 | | | — | | | — | | | 5,709 | |
Conversion of Series B Preferred stock to common-unissued | — | | | — | | | — | | | — | | | — | | | — | | | 760 | | | — | | | — | | | 760 | |
Conversion of Series B1 Preferred stock to common | 5,635 | | | 6 | | | — | | | — | | | — | | | — | | | 8,785 | | | — | | | — | | | 8,791 | |
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Accretion of discount on Series B and B1 | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (284) | | | — | | | (284) | |
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Accretion of redeemable non-controlling interest to redemption value | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (387) | | | — | | | (387) | |
Net loss | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (19,375) | | | 3,418 | | | (15,957) | |
Less: amount attributable to redeemable non-controlling interest | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (3,113) | | | (3,113) | |
Balance on June 30, 2021 | 59,909 | | | $ | 60 | | | 392 | | | $ | — | | | — | | | $ | — | | | $ | 125,804 | | | $ | (109,420) | | | $ | 2,059 | | | $ | 18,503 | |
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See accompanying notes to the consolidated financial statements.
VERTEX ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2022 AND 2021 (in thousands)
(UNAUDITED)
| | | Three Months Ended | | | Six Months Ended | |
| | March 31, 2022 | | March 31, 2021 | | | June 30, 2022 | | June 30, 2021 | |
Cash flows from operating activities | Cash flows from operating activities | | | | | Cash flows from operating activities | | | | |
Net income (loss) | $ | (808,867) | | | $ | 2,965,338 | | | |
Net loss | | Net loss | $ | (64,591) | | | $ | (12,991) | | |
Income from discontinued operations, net of tax | Income from discontinued operations, net of tax | 13,799,642 | | | 5,617,194 | | | Income from discontinued operations, net of tax | 31,643 | | | 9,219 | | |
Loss from continuing operations | Loss from continuing operations | (14,608,509) | | | (2,651,856) | | | Loss from continuing operations | (96,234) | | | (22,210) | | |
Adjustments to reconcile net loss from continuing operations to cash provided by (used in) operating activities, net of acquisitions | Adjustments to reconcile net loss from continuing operations to cash provided by (used in) operating activities, net of acquisitions | | | | | Adjustments to reconcile net loss from continuing operations to cash provided by (used in) operating activities, net of acquisitions | | | | |
Stock based compensation expense | Stock based compensation expense | 249,940 | | | 150,514 | | | Stock based compensation expense | 574 | | | 356 | | |
Depreciation and amortization | Depreciation and amortization | 140,969 | | | 139,413 | | | Depreciation and amortization | 4,026 | | | 282 | | |
| Gain on forgiveness of debt | | Gain on forgiveness of debt | — | | | (4,222) | | |
Gain on sale of assets | | Gain on sale of assets | (82) | | | (1) | | |
Provision for environment clean up | | Provision for environment clean up | 1,428 | | | — | | |
| Gain on sale of assets | (57,402) | | | (1,424) | | | |
| Reduction of allowance for bad debt | (13,272) | | | — | | | |
Increase (reduction) of allowance for bad debt | | Increase (reduction) of allowance for bad debt | (12) | | | 620 | | |
Increase in fair value of derivative warrant liability | Increase in fair value of derivative warrant liability | 3,578,947 | | | 1,780,203 | | | Increase in fair value of derivative warrant liability | 4,524 | | | 23,288 | | |
Loss (gain) on commodity derivative contracts | (257,516) | | | 721,531 | | | |
Loss on commodity derivative contracts | | Loss on commodity derivative contracts | 93,745 | | | 1,925 | | |
Net cash settlements on commodity derivatives | Net cash settlements on commodity derivatives | 640 | | | (1,306,344) | | | Net cash settlements on commodity derivatives | (64,814) | | | (1,961) | | |
Amortization of debt discount and deferred costs | Amortization of debt discount and deferred costs | 1,770,756 | | | — | | | Amortization of debt discount and deferred costs | 40,000 | | | — | | |
Changes in operating assets and liabilities | | | |
Changes in operating assets and liabilities, net of acquisition | | Changes in operating assets and liabilities, net of acquisition | | |
Accounts receivable and other receivables | Accounts receivable and other receivables | (647,503) | | | 564,925 | | | Accounts receivable and other receivables | (85,545) | | | (2,489) | | |
| Inventory | Inventory | (9,316,962) | | | 107,718 | | | Inventory | (67,796) | | | (704) | | |
Prepaid expenses and other current assets | Prepaid expenses and other current assets | (697,848) | | | 670,125 | | | Prepaid expenses and other current assets | (12,614) | | | 1,641 | | |
Accounts payable | Accounts payable | 7,807,105 | | | 814,872 | | | Accounts payable | 46,399 | | | 2,890 | | |
Accrued expenses | Accrued expenses | (753,259) | | | (121,174) | | | Accrued expenses | 26,891 | | | (217) | | |
Other assets | Other assets | (1,300,000) | | | — | | | Other assets | (50) | | | (89) | | |
Net cash provided by (used in) operating activities from continuing operations | (14,103,914) | | | 868,503 | | | |
Net cash used in operating activities from continuing operations | | Net cash used in operating activities from continuing operations | (109,560) | | | (891) | | |
Cash flows from investing activities | Cash flows from investing activities | | | | | Cash flows from investing activities | | | | |
Acquisition of business, net of cash | | Acquisition of business, net of cash | (227,525) | | | 2 | | |
| Software purchase | | Software purchase | (106) | | | — | | |
| Purchase of fixed assets | Purchase of fixed assets | (53,936) | | | (464,039) | | | Purchase of fixed assets | (1,159) | | | (861) | | |
| Investment in Mobile Refinery assets | (6,426,607) | | | — | | | |
| | Proceeds from sale of fixed assets | Proceeds from sale of fixed assets | 131,689 | | | 1,600 | | | Proceeds from sale of fixed assets | 157 | | | 75 | | |
Net cash used in investing activities from continuing operations | Net cash used in investing activities from continuing operations | (6,348,854) | | | (462,439) | | | Net cash used in investing activities from continuing operations | (228,633) | | | (784) | | |
Cash flows from financing activities | Cash flows from financing activities | | | | | Cash flows from financing activities | | | | |
Payments on finance leases | Payments on finance leases | (39,101) | | | (67,382) | | | Payments on finance leases | (107) | | | (134) | | |
Proceeds from exercise of options and warrants to common stock | Proceeds from exercise of options and warrants to common stock | 75,600 | | | 1,652,022 | | | Proceeds from exercise of options and warrants to common stock | 632 | | | 2,829 | | |
Distributions to noncontrolling interest | | Distributions to noncontrolling interest | (380) | | | — | | |
| Line of credit (payments) proceeds, net | — | | | (133,446) | | | |
| Net borrowings on inventory financing agreements | | Net borrowings on inventory financing agreements | 172,607 | | | — | | |
Line of credit proceeds, net | | Line of credit proceeds, net | — | | | 1,032 | | |
Redemption of noncontrolling interest | | Redemption of noncontrolling interest | (50,666) | | | — | | |
Proceeds from note payable, net | | Proceeds from note payable, net | 165,718 | | | — | | |
Payments on note payable | Payments on note payable | (1,375,917) | | | (1,036,581) | | | Payments on note payable | (7,716) | | | (1,837) | | |
Net cash provided by (used in) financing activities from continuing operations | (1,339,418) | | | 414,613 | | | |
Net cash provided by financing activities from continuing operations | | Net cash provided by financing activities from continuing operations | 280,088 | | | 1,890 | | |
| | Discontinued operations: | Discontinued operations: | | | Discontinued operations: | | |
Net cash provided by operating activities | Net cash provided by operating activities | 10,114,115 | | | 1,320,593 | | | Net cash provided by operating activities | 21,366 | | | 5,936 | | |
Net cash used in investing activities | Net cash used in investing activities | (342,573) | | | (554,940) | | | Net cash used in investing activities | (1,578) | | | (1,961) | | |
Net cash used in financing activities | Net cash used in financing activities | (59,045) | | | (54,670) | | | Net cash used in financing activities | (296) | | | (118) | | |
Net cash provided by discontinued operations | Net cash provided by discontinued operations | 9,712,497 | | | 710,983 | | | Net cash provided by discontinued operations | 19,492 | | | 3,857 | | |
| Net change in cash, cash equivalents and restricted cash | Net change in cash, cash equivalents and restricted cash | (12,079,689) | | | 1,531,660 | | | Net change in cash, cash equivalents and restricted cash | (38,613) | | | 4,072 | | |
Cash, cash equivalents, and restricted cash at beginning of the period | Cash, cash equivalents, and restricted cash at beginning of the period | 136,626,939 | | | 10,995,169 | | | Cash, cash equivalents, and restricted cash at beginning of the period | 136,627 | | | 10,995 | | |
Cash, cash equivalents, and restricted cash at end of period | Cash, cash equivalents, and restricted cash at end of period | $ | 124,547,250 | | | $ | 12,526,829 | | | Cash, cash equivalents, and restricted cash at end of period | $ | 98,014 | | | $ | 15,067 | | |
|
| | | | | | | | | | | |
SUPPLEMENTAL INFORMATION | | | |
Cash paid for interest | $ | 21,294 | | | $ | 236,677 | |
Cash paid for taxes | $ | — | | | $ | — | |
NON-CASH INVESTING AND FINANCING TRANSACTIONS | | | |
Equity component of the convertible note issuance | $ | 78,789,472 | | | $ | — | |
Conversion of Series A Preferred Stock into common stock | $ | 5 | | | $ | — | |
Conversion of Series B Preferred Stock into common stock | $ | — | | | $ | 1,978,494 | |
Conversion of Series B1 Preferred Stock into common stock | $ | — | | | $ | 3,256,024 | |
Exchanges of Series B Preferred Stock into common stock | $ | — | | | $ | 4,397,236 | |
Accretion of discount on Series B and B1 Preferred Stock | $ | — | | | $ | 223,727 | |
Dividends-in-kind accrued on Series B and B1 Preferred Stock | $ | — | | | $ | (258,138) | |
Cashless warrant exercise | $ | 1,113 | | | $ | — | |
| | | |
| | | |
Accretion of redeemable noncontrolling interest to redemption value | $ | 421,399 | | | $ | 373,748 | |
| | | |
| | | | | | | | | | | |
SUPPLEMENTAL INFORMATION | | | |
Cash paid for interest | $ | 11,438 | | | $ | 483 | |
Cash paid for taxes | $ | — | | | $ | — | |
NON-CASH INVESTING AND FINANCING TRANSACTIONS | | | |
Equity component of the convertible note issuance | $ | 78,789 | | | $ | — | |
| | | |
Conversion of Series B Preferred Stock into common stock | $ | — | | | $ | 8,447 | |
Conversion of Series B1 Preferred Stock into common stock | $ | — | | | $ | 12,046 | |
Exchanges of Series B Preferred Stock into common stock | $ | — | | | $ | 4,747 | |
Accretion of discount on Series B and B1 Preferred Stock | $ | — | | | $ | 507 | |
Dividends-in-kind accrued on Series B and B1 Preferred Stock | $ | — | | | $ | (258) | |
| | | |
Conversion of Convertible Senior Notes to common stock | $ | 59,822 | | | $ | — | |
Equipment acquired (disposed) under leases | $ | 45,096 | | | $ | 174 | |
Accretion of redeemable noncontrolling interest to redemption value | $ | 428 | | | $ | 762 | |
| | | |
See accompanying notes to the consolidated financial statements.
VERTEX ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,JUNE 30, 2022
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION AND NATURE OF OPERATIONS
The accompanying unaudited interim consolidated financial statements of Vertex Energy, Inc. (the "Company""Company" or "Vertex Energy""Vertex Energy") have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission ("SEC") and should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2021, contained in the Company's annual report, as filed with the SEC on Form 10-K on March 11, 2022 (the "Form 10-K"). The December 31, 2021 balance sheet was derived from the audited financial statements of our 2021 Form 10-K. In the opinion of management all adjustments, consisting of normal recurring adjustments necessary for a fair presentation of financial position and the results of operations for the interim periods presented, have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the consolidated financial statements which would substantially duplicate the disclosures contained in the audited consolidated financial statements for the most recent fiscal year 2021 as reported in Form 10-K have been omitted.
UMO Business
On June 29, 2021, Vertex Energy entered into an Asset Purchase Agreement (the “Sale Agreement”) with Vertex Energy Operating, LLC, Vertex’s wholly-owned subsidiary (“Vertex Operating”) and Vertex Refining LA, LLC (“Vertex LA”) (wholly-owned by Vertex Operating), Vertex Refining OH, LLC (“Vertex OHOhio”) (wholly-owned by HPRM, LLC, of which Vertex Energy currently owns a 35%100% interest)(“HPRM”), Cedar Marine Terminals, L.P. (“CMT”) (indirectly wholly-owned), and H & H Oil, L.P. (“H&H”) (indirectly wholly-owned)(collectively, the “Vertex Entities”, and together, Vertex, Vertex Operating and the Vertex Entities, the “Seller Parties”), as sellers, and Safety-Kleen Systems, Inc., as purchaser (“Safety-Kleen”).
During Pursuant to the third quarter of 2021,Sale Agreement, the Company classified theagreed to sell its used motor oil (UMO) business (the "UMO Business") to Safety-Kleen.
During the third quarter of 2021, the Company classified the UMO Business as held for sale based on management’s intention and the Company’s shareholders’ approval to sell this business. The Company’s historical financial statements have been revised to present the operating results of the UMO business as discontinued operations. The results of operations of this business are presented as “Income (loss) from discontinued operations” in the statement of operations and the related cash flows of this business have been reclassified to discontinued operations for all periods presented. The assets and liabilities of the UMO businessBusiness have been reclassified to “Assets held for sale” and “Liabilities held for sale”, respectively, in the consolidated balance sheet for all periods presented.
On January 24, 2022, each of the Company and its subsidiaries that were party to the Sale Agreement and Safety-Kleen, entered into an Asset Purchase Termination Agreement (the “Termination Agreement”“Termination Agreement”) pursuant to which the Sale Agreement was terminated. Pursuant to the terms of the Termination Agreement, the Company agreed to pay a termination fee to Safety-Kleen of $3,000,000.$3 million. Immediately upon receipt of such termination fee, which the Company paid simultaneously with the execution of the Termination Agreement, the Sale Agreement was terminated and is of no further force or effect, and with no further liability to any party thereunder, other than certain confidentiality obligations of the parties and ongoing liability for any willful or intentional breach of, or non-compliance with, the Sale Agreement.
The Company is still exploring opportunities to sell the UMO Business and believes it will sell such assets within a year.
NOTE 2. SUMMARY OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Cash, Cash Equivalents and Restricted Cash
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the consolidated balance sheets to the same such amounts shown in the consolidated statements of cash flows.flows (in thousands).
| | | March 31, 2022 | | December 31, 2021 | | June 30, 2022 | | December 31, 2021 |
Cash and cash equivalents | Cash and cash equivalents | $ | 24,050,252 | | | $ | 36,129,941 | | Cash and cash equivalents | $ | 97,914 | | | $ | 36,130 | |
Restricted cash | Restricted cash | 100,496,998 | | | 100,496,998 | | Restricted cash | 100 | | | 100,497 | |
Cash and cash equivalents and restricted cash as shown in the consolidated statements of cash flows | Cash and cash equivalents and restricted cash as shown in the consolidated statements of cash flows | $ | 124,547,250 | | | $ | 136,626,939 | | Cash and cash equivalents and restricted cash as shown in the consolidated statements of cash flows | $ | 98,014 | | | $ | 136,627 | |
The Company has placed $100,125$100 thousand of restricted cash in a money market account, to serve as collateral for payment of a credit card, and $100,396,873card. As of December 31, 2021, a total of $100 million of restricted cash was held in an escrow account in connection with the issuance of the convertible notes, which has beenwas released in conjunction with the purchase of the Mobile Refinery (defined below) on April 1, 2022.
Accounts Receivable
Accounts receivable represents amounts due from customers. Accounts receivable are recorded at invoiced amounts, net of reserves and allowances, do not bear interest and are not collateralized. The Company uses its best estimate to determine the required allowance for doubtful accounts based on a variety of factors, including the length of time receivables are past due, economic trends and conditions affecting its customer base, significant one-time events, and historical write-off experience. Specific provisions are recorded for individual receivables when we become aware of a customer’s inability to meet its financial obligations. The Company reviews the adequacy of its reserves and allowances quarterly.
Receivable balances greater than 90 days past due are individually reviewed for collectability and if deemed uncollectible, are charged off against the allowance accounts after all means of collection have been exhausted and the potential for recovery is considered remote. The allowance was $986,412$1 million and $999,683$1 million at March 31,June 30, 2022 and December 31, 2021, respectively.
Inventory and Obligations Under Inventory Financing Agreements
Inventories of products consist of feedstocks, refined petroleum products and recovered ferrous and non-ferrous metalsmetals. Commodity inventories, excluding commodity inventories at the Mobile Refinery (defined and discussed below under “Note 14. Share Purchase, Subscription Agreements and Mobile Refinery Acquisition — Mobile Refinery Acquisition”), are reportedstated at the lower of cost or net realizable value. Cost is determinedvalue using the first-in, first-out (“first in, first out (FIFO) accounting method. Commodity inventories at the Mobile Refinery are stated at the lower of cost or net realizable value using the weighted average inventory accounting method. We value merchandise along with spare parts, materials, and supplies at average cost. Estimating the net realizable value of our inventory requires management to make assumptions about the timing of sales and the expected proceeds that will be realized for these sales.
All of the crude oil utilized at the Mobile Refinery is financed by Macquarie Energy North America Trading Inc. ("Macquarie") under procurement contracts. The crude oil remains in the legal title of Macquarie and is stored in our storage tanks governed by a storage agreement. Legal title to the crude oil passes to us at the tank outlet. After processing, Macquarie takes title to the refined products stored in our storage tanks until they are sold to our retail locations or to third parties. We record the inventory owned by Macquarie on our behalf as inventory with a corresponding accrued liability on our balance sheet because we maintain the risk of loss until the refined products are sold to third parties and we have an obligation to repurchase it. The valuation of our repurchase obligation requires that we make estimates of the prices and differentials assuming settlement occurs at the end of the reporting period.
In connection with the consummation of the Mobile Acquisition (defined and discussed below under “FIFONote 14. Share Purchase, Subscription Agreements and Mobile Refinery Acquisition — Mobile Refinery Acquisition”) method., the Company became a party to a Supply and Offtake Agreement with Macquarie. Under this arrangement, the Company purchases crude oil supplied from third-party suppliers and Macquarie provides credit support for certain of these purchases. Macquarie holds title to all crude oil and refined products inventories, except for liquefied petroleum gases or sulfur, at all times and pledges such inventories, together with all receivables arising from the sales of these inventories. The Company reviews its inventory commoditiesvaluation of our terminal obligation requires that we make estimates of the prices and differentials for impairment whenever events or circumstances indicate that the value may not be recoverable. The Company determined that no impairment existed during the three months ended March 31, 2022 and 2021.our then monthly forward purchase obligations.
Impairment of long-lived assets
The Company evaluates the carrying value and recoverability of its long-lived assets when circumstances warrant such evaluation. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable through the estimated undiscounted cash flows expected to result from the use and eventual disposition of the assets. Whenever any such impairment exists, an impairment loss will be recognized for the
amount by which the carrying value exceeds the fair value. The Company determined that no long-lived asset impairment existed during the threesix months ended March 31,June 30, 2022 and 2021.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAPgenerally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and reported amounts of revenue and expenses. Actual results could differ from these estimates. Any effects on the business, financial position or results of operations from revisions to these estimates are recorded in the period in which the facts that give rise to the revision become known.
Reclassification of Prior Year Presentation
Certain prior period amounts have been reclassified to conform to current period presentation. These reclassifications had no effect on the reported results of operations.
Redeemable Noncontrolling Interests
As more fully described in “Note 14. Share Purchase and Subscription Agreements”, the Company is party to put/call option agreements with the holder of Vertex Refining Myrtle Grove LLC (“MG SPV”) and HPRM LLC, a Delaware limited liability company (“Heartland SPV”), which entities were formed as special purpose vehicles in connection with the transactions described in greater detail below, non-controlling interests. The put options permit MG SPV's and Heartland SPV's non-
controllingnon-controlling interest holders, at any time on or after the earlier of (a) the fifth anniversary of the applicable closing date of such issuances and (ii) the occurrence of certain triggering events (an “MG Redemption” and "Heartland Redemption", as applicable) to require MG SPV and Heartland SPV to redeem the non-controlling interest from the holder of such interest. Applicable accounting guidance requires an equity instrument that is redeemable for cash or other assets to be classified outside of permanent equity if it is redeemable (a) at a fixed or determinable price on a fixed or determinable date, (b) at the option of the holder, or (c) upon the occurrence of an event that is not solely within the control of the issuer. Based on this guidance, the Company has classified the MG SPV and Heartland SPV non-controlling interests between the liabilities and equity sections of the accompanying consolidated balance sheets. If an equity instrument subject to the guidance is currently redeemable, the instrument is adjusted to its maximum redemption amount at the balance sheet date. If the equity instrument subject to the guidance is not currently redeemable but it is probable that the equity instrument will become redeemable (for example, when the redemption depends solely on the passage of time), the guidance permits either of the following measurement methods: (a) accrete changes in the redemption value over the period from the date of issuance (or from the date that it becomes probable that the instrument will become redeemable, if later) to the earliest redemption date of the instrument using an appropriate methodology, or (b) recognize changes in the redemption value immediately as they occur and adjust the carrying amount of the instrument to equal the redemption value at the end of each reporting period. The amount presented in temporary equity should be no less than the initial amount reported in temporary equity for the instrument. Because the MG SPV and Heartland SPV equity instruments will become redeemable solely based on the passage of time, the Company determined that it is probable that the MG SPV and Heartland SPV equity instruments will become redeemable. The Company has elected to apply the second of the two measurement options described above. An adjustment to the carrying amount of a non-controlling interest from the application of the above guidance does not impact net loss in the consolidated financial statements. Rather, such adjustments are treated as equity transactions and adjustment to net loss in determining net loss available to common stockholders for the purpose of calculating earnings per share. On April 1, 2022, the Company redeemed the non-controlling interest holder's interest of MG SPV, and on May 26, 2022, the Company redeemed the non-controlling interest holder's interest of Heartland SPV.
Variable Interest Entities
The Company determines whether each business entity in which it has equity interests, debt, or other investments constitutes a variable interest entity (“VIE”) based on consideration of the following criteria: (i) the entity lacks sufficient equity at-risk to finance its activities without additional subordinated financial support, or (ii) equity holders, as a group, lack the characteristics of a controlling financial instrument.
If an entity is determined to be a VIE, the Company then determines whether to consolidate the entity as the primary beneficiary. The primary beneficiary has both (i) the power to direct the activities that most significantly impact the VIE’s economic performance, and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the entity.
Assets and Liabilities Held for Sale
The Company classifies disposal groups as held for sale in the period in which all of the following criteria are met: (1) management, having the authority to approve the action, commits to a plan to sell the disposal group; (2) the disposal group is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such disposal groups; (3) an active program to locate a buyer or buyers and other actions required to complete the plan to sell the disposal group have been initiated; (4) the sale of the disposal group is probable, and transfer of the disposal group is expected to qualify for recognition as a completed sale, within one year, except if events or circumstances beyond the Company’s control extend the period of time required to sell the disposal group beyond one year; (5) the disposal group is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and (6) actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
A disposal group that is classified as held for sale is initially measured at the lower of its carrying amount or fair value less any costs to sell. Any loss resulting from this measurement is recognized in the period in which the held for sale criteria are met. No loss was recognized during the periods presented.
Subsequent changes in the fair value of a disposal group less any costs to sell are reported as an adjustment to the carrying amount of the disposal group, as long as the new carrying amount does not exceed the carrying amount of the asset at the time it was initially classified as held for sale. Upon determining that a disposal group meets the criteria to be classified as held for sale, the Company reports the assets and liabilities of the disposal group for all periods presented in the line items assets held for sale and liabilities held for sale, respectively, in the consolidated balance sheets.
Discontinued Operations
The results of operations of a component of the Company that can be clearly distinguished, operationally and for financial reporting purposes, that either has been disposed of or is classified as held for sale is reported in discontinued operations, if the disposal represents a strategic shift that has, or will have, a major effect on the Company’s operations and financial results.
Revenue Recognition
Our revenues are generated through the sale of refined petroleum products and terminalling and storage services. We recognize revenue from product sales at prevailing market rates at the point in time in which the customer obtains control of the product. Terminalling and storage revenues are recognized as services are rendered, and our performance obligations have been satisfied once the product has been transferred back to the customer. These services are short-term in nature, and the service fees charged to our customers are at prevailing market rates. The timing of our revenue recognition may differ from the timing of payment from our customers. A receivable is recorded when revenue is recognized prior to payment and we have an unconditional right to payment.
Environmental Matters
We accrue for losses associated with environmental remediation obligations when such losses are probable and reasonably estimable. The liability represents the expected costs of remediating contaminated soil and groundwater at the site. Costs of future expenditures for environmental remediation obligations are discounted to their present value.
Recently adopted accounting pronouncements
In August 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity to simplify the accounting for convertible debt and other equity-linked instruments. The new guidance simplifies the accounting for convertible instruments by eliminating the cash conversion and beneficial conversion feature models used to separately account for embedded conversion features as a component of equity. Instead, the entity will account for the convertible debt or convertible preferred stock securities as a single unit of account, unless the conversion feature requires bifurcation and recognition as derivatives. Additionally, the guidance requires entities to use the if-converted method for all convertible instruments in the diluted earnings per share calculation and include the effect of potential share settlement for instruments that may be settled in cash or shares. The Company adopted this new guidance as of January 1, 2022, under the modified retrospective method.
NOTE
NOTE 3. CONCENTRATIONS, SIGNIFICANT CUSTOMERS, COMMITMENTS AND CONTINGENCIES
At March 31,June 30, 2022 and 2021 and for each of the threesix months then ended, the Company’s revenues and receivables were comprised of the following customer concentrations:
| | | | | | | | | | | | | | | | | | | | | | | As of and for the Six Months Ended |
| | Three Months Ended March 31, 2022 | | Three Months Ended March 31, 2021 | | June 30, 2022 | | June 30, 2021 |
| | % of Revenues | | % of Receivables | | % of Revenues | | % of Receivables | | % of Revenues | | % of Receivables | | % of Revenues | | % of Receivables |
Customer 1 | Customer 1 | 22% | | 24% | | 23% | | 20% | Customer 1 | 42% | | 1% | | 21% | | 14% |
Customer 2 | Customer 2 | 19% | | 18% | | 15% | | 10% | Customer 2 | 17% | | 18% | | 17% | | 20% |
Customer 3 | Customer 3 | 12% | | —% | | 12% | | 18% | Customer 3 | 9% | | —% | | 16% | | 10% |
|
For each of the threesix months ended March 31,June 30, 2022 and 2021, the Company’s segment revenues were comprised of the following customer concentrations:
| | | % of Revenue by Segment | | % Revenue by Segment | | % of Revenue by Segment | | % Revenue by Segment |
| | Three Months Ended March 31, 2022 | | Three Months Ended March 31, 2021 | | Six Months Ended June 30, 2022 | | Six Months Ended June 30, 2021 |
| | Black Oil | | Refining | | Recovery | | Black Oil | | Refining | | Recovery | | Black Oil | | Refining | | Recovery | | Black Oil | | Refining | | Recovery |
Customer 1 | Customer 1 | —% | | 26% | | —% | | —% | | 30% | | —% | Customer 1 | —% | | 43% | | —% | | —% | | 27% | | —% |
Customer 2 | Customer 2 | —% | | 22% | | —% | | —% | | 20% | | —% | Customer 2 | —% | | 18% | | —% | | —% | | —% | | 78% |
Customer 3 | Customer 3 | —% | | 13% | | —% | | —% | | 15% | | —% | Customer 3 | —% | | 9% | | —% | | —% | | 20% | | —% |
|
The Company had one vendor that represented 70% and 62%59% of total purchases for the six months ended June 30, 2022 and 65%2021, respectively, and 72%73% and 69% of total payables for the three months ended March 31,at June 30, 2022 and 2021, respectively.
The Company’s revenue, profitability and future rate of growth are substantially dependent on prevailing prices for petroleum-based products. Historically, the energy markets have been very volatile, and there can be no assurance that these prices will not be subject to wide fluctuations in the future. A substantial or extended decline in such prices could have a material adverse effect on the Company’s financial position, results of operations, cash flows, access to capital, and the quantities of petroleum-based products that the Company can economically produce.
Litigation
The Company, in its normal course of business, is involved in various other claims and legal action. In the opinion of management, the outcome of these claims and actions will not have a material adverse impact upon the financial position of the Company. We are currently party to the following material litigation proceedings:
Vertex Refining LA, LLC (“Vertex Refining LA”), the wholly-owned subsidiary of Vertex Operating was named as a defendant, along with numerous other parties, in five lawsuits filed on or about February 12, 2016, in the Second Parish Court
for the Parish of Jefferson, State of Louisiana, Case No. 121749, by Russell Doucet et. al., Case No. 121750, by Kendra Cannon et. al., Case No. 121751, by Lashawn Jones et. al., Case No. 121752, by Joan Strauss et. al. and Case No. 121753, by Donna Allen et. al. The suits relate to alleged noxious and harmful emissions from our facility located in Marrero, Louisiana. The suits seek damages for physical and emotional injuries, pain and suffering, medical expenses and deprivation of the use and enjoyment of plaintiffs’ homes. We intend to vigorously defend ourselves and oppose the relief sought in the complaints, provided that at this stage of the litigation, the Company has no basis for determining whether there is any likelihood of material loss associated with the claims and/or the potential and/or the outcome of the litigation.
On November 17, 2020, Vertex filed a lawsuit against Penthol LLC (“Penthol”) in the 61st Judicial District Court of Harris County, Texas, Cause No. 2020-65269, for breach of contract and simultaneously sought a Temporary Restraining Order and Temporary Injunction enjoining Penthol from, among other things, circumventing Vertex in violation of the terms of that certain June 5, 2016 Sales Representative and Marketing Agreement entered into between Vertex Operating and Penthol (the “Penthol Agreement”). Vertex seeks permanent injunctive relief, damages, attorney’s fees, costs of court, and all other relief to which it may be entitled. On February 8, 2021, Penthol filed a complaint against Vertex Operating in the United States District Court for the Southern District of Texas; Civil Action No. 4:21-CV-416 (the “Complaint”). Penthol’s Complaint sought damages from Vertex Operating for alleged violations of the Sherman Act, breach of contract, business disparagement, and misappropriation of trade secrets under the Defend Trade Secrets Act and Texas Uniform Trade Secrets Act. On August 12, 2021, United States District Judge Andrew S. Hanen dismissed Penthol’s Sherman Act claim. Penthol’s remaining claims are pending. Penthol is seeking a declaration that Vertex has materially breached the agreement; an injunction that prohibits Vertex from using Penthol’s alleged trade secrets and requires Vertex to return any of Penthol’s alleged trade secrets; awards of actual, consequential and exemplary damages, attorneys’ fees and costs of court; and other relief to which it may be entitled. Vertex
denies Penthol’s allegations in the Complaint. Vertex contends Penthol’s claims are completely without merit, and that Penthol’s termination of the Penthol Agreement was wrongful and resulted in damages to Vertex that it is seeking to recover in the Harris County lawsuit. Further, Vertex contends that Penthol’s termination of the Penthol Agreement constitutes a breach by Penthol under the express terms of the Penthol Agreement, and that Vertex remains entitled to payment of the amounts due Vertex under the Penthol Agreement for unpaid commissions and unpaid performance incentives. Vertex disputes Penthol’s allegations of wrongdoing and intends to vigorously defend itself in this matter. On February 26, 2021, Penthol filed its second amended answer and counterclaims, alleging that Vertex improperly terminated the Penthol Agreement and that Vertex tortiously interfered with Penthol’s prospective and existing business relationships. Vertex denies these allegations and is vigorously defending them. This case is pending but is currently set for trial in February 2023.
We cannot predict the impact (if any) that any of the matters described above may have on our business, results of operations, financial position, or cash flows. Because of the inherent uncertainties of such matters, including the early stage and lack of specific damage claims in the Penthol matter, we cannot estimate the range of possible losses from them (except as otherwise indicated).
Related Parties
From time to time, the Company consults Ruddy Gregory, PLLC., a related party law firm of which James Gregory, a member of the Board of Directors, serves as a partner. During the threesix months ended March 31,June 30, 2022 and 2021, we paid $128,984 and $33,228,$382 thousand and $134 thousand, respectively, to such law firm for services rendered, ,whichwhich services includes the drafting and negotiation of, and due diligence associated with, the Sale Agreement and Refinery Purchase Agreement (defined and discussed below), and related transactions, including the Loan and Security Agreement and Supply and Offtake Agreement, discussed below.
May 2021 Purchase Agreement
On May 26, 2021, Vertex Operating, entered into a Sale and Purchase Agreement (the “Refinery Purchase Agreement”) with Equilon Enterprises LLC d/b/a Shell Oil Products US, Shell Oil Company and Shell Chemical LP, subsidiaries of Shell plc
(“Shell”), to purchase Shell’s Mobile, Alabama refinery, certain real property associated therewith, and related assets, including all inventory at the refinery as of closing and certain equipment, rolling stock, and other personal property associated with the Mobile refinery (collectively, the “Mobile Refinery” and the “Mobile Acquisition”). The Mobile Refinery is located on an 800+ acre site in the city and county of Mobile, Alabama. The 91,000 barrel-per-day nameplate capacity Mobile Refinery is capable of sourcing a flexible mix of cost-advantaged light-sweet domestic and international feedstocks. Approximately 70% of the refinery’s annual production is distillate, gasoline and jet fuel, with the remainder being vacuum gas oil, liquefied petroleum gas (LPG) and other products. The facility distributes its finished product across the southeastern United States through a high-capacity truck rack, together with deep and shallow water distribution points capable of supplying waterborne vessels.
In addition to refining assets, the Mobile Acquisition included the acquisition by the Company of approximately 3.2 million barrels of inventory and product storage, logistics and distribution assets, together with more than 800+ acres of developed and undeveloped land.
The initial base purchase price for the assets is $75 million. In addition, we agreed to pay for the hydrocarbon inventory located at the Mobile Refinery, as valued at closing, and the purchase price is subject to other customary purchase price adjustments and reimbursement for certain capital expenditures, resulting in an expected total purchase price of approximately $99.9 million.
In connection with Vertex Operating’s execution of the Refinery Purchase Agreement, and as a required term and condition thereof, Vertex Operating provided Shell a promissory note in the amount of $10 million (the “Deposit Note”). Pursuant to the terms of the Refinery Purchase Agreement, the terms of such agreement (other than exclusivity through December 31, 2021, or such earlier date that the Refinery Purchase Agreement is terminated), were not legally binding on Shell until such time as Vertex Operating funded the Deposit Note in cash (which note has been paid in full to date). The Deposit Note did not accrue interest unless or until an event of default occurred under such note, at which time interest was to accrue at 12% per annum until paid. The entire balance of the Deposit Note was due upon the earlier of (i) 45 calendar days following the date of the Deposit Note (i.e., July 10, 2021); and (ii) five calendar days following the closing of any transaction between Vertex Operating and any third party, which Deposit Note was paid in full prior to such applicable due date. This deposit is recorded in other assets in the consolidated balance sheet at March 31, 2022 and December 31, 2021.
The Refinery Purchase Agreement contemplates the Company and Shell entering into various supply and offtake agreements at closing.
The Mobile Acquisition closed on April 1, 2022, and the funds paid for such acquisition included funds raised through the sale of the Convertible Senior Notes issued on November 1, 2021 (see “Note 6. Financing Arrangements").
Moving forward, Vertex plans to complete an $85 million capital project designed to modify the Mobile Refinery’s hydrocracking unit to produce renewable diesel fuel on a standalone basis, with funds raised through a Term Loan issued on April 1, 2022 (see “Note 16. Subsequent Events”).
In connection with the entry into the Refinery Purchase Agreement, Vertex Operating and Shell entered into a Swapkit Purchase Agreement (the “Swapkit Agreement”) which was funded at closing, and totaled $8.7 million.
Commitment Letter and Escrow Agreement
On February 17, 2022, the Company and Vertex Refining entered into a commitment letter with a syndicate of lenders (the “Lenders”) in respect of a three-year, $125 million first-lien senior secured term loan facility (the “Term Loan”). The closing date and the funding of the Term Loan were subject to the closing of Vertex’s planned acquisition of the Mobile refinery, in addition to various conditions precedent, as set forth in more detail in the Commitment Letter.
On March 2, 2022, (1) the Company, (2) Vertex Refining, (3) the Lenders and (4) Cantor Fitzgerald Securities (the “Escrow Agent”), entered into an Escrow Agreement (the “Escrow Agreement”). Pursuant to the Escrow Agreement, on March 2, 2022 each of the Lenders deposited their pro rata portion of the $125 million loan amount, less certain upfront fees, into an escrow account, which was released on April 1, 2022, the date that the Mobile Acquisition (defined below) was consummated. More detailed information regarding the acquisition and Term Loan is described in "Loan and Security Agreement" in "Note 16, Subsequent Events". The Company paid $2.5 million of fees related to the Term Loan in March 2022.
NOTE 4. REVENUES
Disaggregation of Revenue
The following tables present our revenues disaggregated by geographical market and revenue source:source (in thousands):
| | | Three Months Ended March 31, 2022 | | Three Months Ended June 30, 2022 |
| | Black Oil | | Refining & Marketing | | Recovery | | Total | | Black Oil | | Refining & Marketing | | Recovery | | Total |
Primary Geographical Markets | Primary Geographical Markets | | | | | | | | Primary Geographical Markets | | | | | | | |
| Southern United States | Southern United States | $ | 1,550,287 | | | $ | 34,718,918 | | | $ | 3,947,591 | | | $ | 40,216,796 | | Southern United States | $ | 20,254 | | | $ | 966,390 | | | $ | 5,195 | | | $ | 991,839 | |
Sources of Revenue | Sources of Revenue | | | | | | | | Sources of Revenue | | | | | | | |
Gasolines | | Gasolines | — | | | 255,909 | | | — | | | 255,909 | |
Jet Fuels | | Jet Fuels | — | | | 143,688 | | | — | | | 143,688 | |
Diesel | | Diesel | — | | | 322,317 | | | — | | | 322,317 | |
| Pygas | Pygas | $ | — | | | $ | 4,690,268 | | | $ | — | | | $ | 4,690,268 | | Pygas | — | | | 20,685 | | | — | | | 20,685 | |
Industrial fuel | — | | | 572,281 | | | — | | | 572,281 | | |
Distillates | — | | | 29,456,369 | | | — | | | 29,456,369 | | |
| Oil collection services | Oil collection services | 213,536 | | | — | | | 0 | | 213,536 | | Oil collection services | 26 | | | — | | | — | | | 26 | |
Metals | Metals | — | | | — | | | 3,414,286 | | | 3,414,286 | | Metals | — | | | — | | | 4,318 | | | 4,318 | |
Other re-refinery products | — | | | — | | | 533,305 | | | 533,305 | | |
Other refinery products | | Other refinery products | 666 | | | 72,460 | | | 877 | | | 74,003 | |
VGO/Marine fuel sales | VGO/Marine fuel sales | 1,336,751 | | | — | | | — | | | 1,336,751 | | VGO/Marine fuel sales | 19,562 | | | 151,331 | | | — | | | 170,893 | |
Total revenues | Total revenues | $ | 1,550,287 | | | $ | 34,718,918 | | | $ | 3,947,591 | | | $ | 40,216,796 | | Total revenues | $ | 20,254 | | | $ | 966,390 | | | $ | 5,195 | | | $ | 991,839 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2021 |
| Black Oil | | Refining & Marketing | | Recovery | | Total |
Primary Geographical Markets | | | | | | | |
| | | | | | | |
| | | | | | | |
Southern United States | $ | 122,986 | | | $ | 19,273,952 | | | $ | 5,648,305 | | | $ | 25,045,243 | |
Sources of Revenue | | | | | | | |
| | | | | | | |
Pygas | $ | — | | | $ | 2,972,431 | | | $ | — | | | $ | 2,972,431 | |
Industrial fuel | — | | | 311,693 | | | — | | | 311,693 | |
Distillates | — | | | 15,989,828 | | | — | | | 15,989,828 | |
Oil collection services | 122,986 | | | — | | | 3,423 | | | 126,409 | |
Metals | — | | | — | | | 5,644,882 | | | 5,644,882 | |
| | | | | | | |
| | | | | | | |
Total revenues | $ | 122,986 | | | $ | 19,273,952 | | | $ | 5,648,305 | | | $ | 25,045,243 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2021 |
| Black Oil | | Refining & Marketing | | Recovery | | Total |
Primary Geographical Markets | | | | | | | |
| | | | | | | |
| | | | | | | |
Southern United States | $ | 155 | | | $ | 23,836 | | | $ | 6,237 | | | $ | 30,228 | |
Sources of Revenue | | | | | | | |
Gasolines | — | | | 6,083 | | | — | | | 6,083 | |
| | | | | | | |
Diesel | — | | | 13,481 | | | — | | | 13,481 | |
| | | | | | | |
Pygas | — | | | 3,862 | | | — | | | 3,862 | |
Industrial fuel | — | | | 410 | | | — | | | 410 | |
Oil collection services | 155 | | | — | | | — | | | 155 | |
Metals | — | | | — | | | 6,151 | | | 6,151 | |
Other refinery products | — | | | — | | | 86 | | | 86 | |
| | | | | | | |
Total revenues | $ | 155 | | | $ | 23,836 | | | $ | 6,237 | | | $ | 30,228 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2022 |
| Black Oil | | Refining & Marketing | | Recovery | | Total |
Primary Geographical Markets | | | | | | | |
| | | | | | | |
| | | | | | | |
Southern United States | $ | 21,804 | | | $ | 1,001,109 | | | $ | 9,143 | | | $ | 1,032,056 | |
Sources of Revenue | | | | | | | |
Gasolines | — | | | 263,458 | | | — | | | 263,458 | |
Jet Fuels | — | | | 143,688 | | | — | | | 143,688 | |
Diesel | — | | | 344,225 | | | — | | | 344,225 | |
| | | | | | | |
Pygas | — | | | 25,375 | | | — | | | 25,375 | |
Industrial fuel | — | | | 572 | | | — | | | 572 | |
Oil collection services | 240 | | | — | | | — | | | 240 | |
Metals | — | | | — | | | 7,733 | | | 7,733 | |
Other refinery products | 666 | | | 72,460 | | | 1,410 | | | 74,536 | |
VGO/Marine fuel sales | 20,898 | | | 151,331 | | | — | | | 172,229 | |
Total revenues | $ | 21,804 | | | $ | 1,001,109 | | | $ | 9,143 | | | $ | 1,032,056 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2021 |
| Black Oil | | Refining & Marketing | | Recovery | | Total |
Primary Geographical Markets | | | | | | | |
| | | | | | | |
| | | | | | | |
Southern United States | $ | 278 | | | $ | 43,110 | | | $ | 11,885 | | | $ | 55,273 | |
Sources of Revenue | | | | | | | |
Gasolines | — | | | 10,494 | | | — | | | 10,494 | |
| | | | | | | |
Diesel | — | | | 25,060 | | | — | | | 25,060 | |
| | | | | | | |
Pygas | — | | | 6,835 | | | — | | | 6,835 | |
Industrial fuel | — | | | 721 | | | — | | | 721 | |
Oil collection services | 278 | | | — | | | 3 | | | 281 | |
Metals | — | | | — | | | 11,796 | | | 11,796 | |
Other refinery products | — | | | — | | | 86 | | | 86 | |
| | | | | | | |
Total revenues | $ | 278 | | | $ | 43,110 | | | $ | 11,885 | | | $ | 55,273 | |
NOTE 5. ACCOUNTS RECEIVABLE
Accounts receivable, net, consists of the following at March 31,June 30, 2022 and December 31, 2021:2021(in thousands):
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
Accounts receivable trade | $ | 6,944,054 | | | $ | 6,296,550 | |
Allowance for doubtful accounts | (986,412) | | | (999,683) | |
Accounts receivable trade, net | $ | 5,957,642 | | | $ | 5,296,867 | |
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
Accounts receivable trade | $ | 91,866 | | | $ | 6,297 | |
Allowance for doubtful accounts | (1,012) | | | (1,000) | |
Accounts receivable trade, net | $ | 90,854 | | | $ | 5,297 | |
Accounts receivable trade represents amounts due from customers. Accounts receivable trade are recorded at invoiced amounts, net of reserves and allowances and do not bear interest.
NOTE 6. FINANCING ARRANGEMENTS
The Company's outstanding debt facilities as of June 30, 2022 and December 31, 2021 are summarized as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
Creditor | Loan Type | | | | | | | | Balance on June 30, 2022 | | Balance on December 31, 2021 |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Term Loan 2025 | Loan | | | | | | | | $ | 165,000 | | | $ | — | |
John Deere Note | Note | | | | | | | | — | | | 93 | |
AVT Equipment Lease-HH | Finance Lease | | | | | | | | — | | | 302 | |
SBA Loan | SBA Loan | | | | | | | | 59 | | | 59 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
VRA Finance Lease | Finance Lease | | | | | | | | 45,291 | | | — | |
Various institutions | Insurance premiums financed | | | | | | | | 9,236 | | | 2,375 | |
Principal amount of long-term debt and finance lease liabilities | | | | | | | | | 219,586 | | | 2,829 | |
Less: unamortized discount and deferred financing costs | | | | | | | | | (37,035) | | | — | |
Total debt, net of unamortized discount and deferred financing costs | | | | | | | | | 182,551 | | | 2,829 | |
Less: current maturities, net of unamortized discount and deferred financing costs | | | | | | | | | (2,579) | | | (2,715) | |
Long term debt and finance lease liabilities, net of current maturities | | | | | | | | | $ | 179,972 | | | $ | 114 | |
Future contractual principal maturities of notes payable as of June 30, 2022 are summarized as follows (in thousands):
| | | | | | | | |
Year Ended June 30, | | Amount Due |
2023 | | $ | 14,013 | |
2024 | | 9,514 | |
2025 | | 154,049 | |
2026 | | 1,605 | |
2027 | | 1,809 | |
Thereafter | | 38,596 | |
Total | | $ | 219,586 | |
Insurance Premiums
The Company financed insurance premiums through various financial institutions bearing interest rates from 3.49%3.24% to 4.09% per annum. All such premium finance agreements have maturities of less than one year and have a balance of $1,008,621$9.2 million at March 31,June 30, 2022 and $2,375,071$2.4 million at December 31, 2021.
Finance Leases
On May 22, 2020,April 1, 2022, the Company entered into 1 finance lease. PaymentsBase payments are $15,078$0.4 million per month for three yearsthe first six months, increasing to $0.5 million per month for the next 180 months. The amount of the right of use assets is $44.4 million at June 30, 2022, and the finance lease obligation is $45 million at June 30, 2022.
Term Loan
On April 1, 2022 (the “Closing Date”), Vertex Refining; the Company, as a guarantor; substantially all of the Company’s direct and indirect subsidiaries, as guarantors (together with the Company, the “Guarantors”); certain funds and accounts under management by BlackRock Financial Management, Inc. or its affiliates, as lenders (“BlackRock”), certain funds managed or advised by Whitebox Advisors, LLC, as lenders (“Whitebox”), certain funds managed by Highbridge Capital Management, LLC, as lenders (“Highbridge”), Chambers Energy Capital IV, LP, as a lender (“Chambers”), CrowdOut Capital LLC, as a lender (“CrowdOut Capital”), CrowdOut Credit Opportunities Fund LLC, as a lender (collectively with BlackRock, Whitebox, Highbridge, Chambers and CrowdOut Capital, the “Lenders”); and Cantor Fitzgerald Securities, in its capacity as
administrative agent and collateral agent for the Lenders (the “Agent”), entered into a Loan and Security Agreement (the “Loan and Security Agreement”).
Pursuant to the Loan and Security Agreement, the Lenders agreed to provide a $125 million term loan to Vertex Refining (the “Initial Term Loan”), the proceeds of which, less agreed upon fees and discounts, were held in escrow prior to the Closing Date, pursuant to an Escrow Agreement. On the Closing Date, net proceeds from the term loans, less the agreed upon fees and discounts, as well as certain transaction expenses, were released from escrow to Vertex Refining in an aggregate amount of $94 million.
On May 26, 2022, each of the Initial Guarantors (including the Company), Vertex Ohio, HPRM LLC, a Delaware limited liability company (“HPRM”), and Tensile-Heartland Acquisition Corporation, a Delaware corporation (“Tensile-Heartland”, and together with Vertex Ohio and HPRM, the “Additional Guarantors”, and the Additional Guarantors, together with the Initial Guarantors, the “Guarantors”, and the Guarantors, together with Vertex Refining, the “Loan Parties”), entered into an Amendment Number One to Loan and Security Agreement (“Amendment No. One to Loan Agreement”), with certain of the Lenders and CrowdOut Warehouse LLC, as a lender (the “Additional Lenders” and together with the Initial Lenders, the “Lenders”) and the Agent, pursuant to which, the amount of the finance lease obligation has been reducedTerm Loan (as defined below) was increased from $125 million to $263,065 at$165 million, with the Additional Lenders providing an additional term loan in the amount of $40 million (the “Additional Term Loan”, and together with the Initial Term Loan, the “Term Loan”).
Pursuant to the Loan and Security Agreement, on the last day of March, June, September and December of each year (or if such day is not a business day, the next succeeding business day), beginning on March 31, 2022.2023 and ending on December 31, 2024, Vertex Refining is required to repay $2 million of the principal amount owed under the Loan and Security Agreement (i.e., 1.25% of the original principal amount per quarter), subject to reductions in the event of any prepayment of the Loan and Security Agreement.
The Company's outstanding debt facilitiesCompany used a portion of the proceeds from the Term Loan borrowing to pay a portion of the purchase price associated with the acquisition of the Mobile Refinery (defined below) acquired by Vertex Refining on April 1, 2022, as discussed in greater detail below, and to pay certain fees and expenses associated with the closing of March 31, 2022the Loan and December 31, 2021 are summarized as follows:Security Agreement and is required to use the remainder of the funds for (i) the planned renewable diesel conversion of the Mobile Refinery, and (ii) working capital and liquidity needs.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Creditor | Loan Type | | Origination Date | | Maturity Date | | Loan Amount | | Balance on March 31, 2022 | Balance on December 31, 2021 |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
John Deere Note | Note | | May 27, 2020 | | June 24, 2024 | | $ | 152,643 | | | $ | 84,537 | | $ | 94,005 | |
AVT Equipment Lease-HH | Finance Lease | | May 22, 2020 | | May 22, 2023 | | $ | 551,609 | | | 263,065 | | 302,166 | |
SBA Loan | SBA Loan | | July 18, 2020 | | July 18, 2050 | | $ | 58,700 | | | 58,700 | | 58,700 | |
| | | | | | | | | | |
| | | | | | | | | | |
Various institutions | Insurance premiums financed | | Various | | < 1 year | | $ | 5,604,748 | | | 1,008,621 | | 2,375,071 | |
Total | | | | | | | | | $ | 1,414,923 | | $ | 2,829,942 | |
| | | | | | | | | | |
| | | | | | | | | | |
Warrant Agreement and Derivative Liabilities
In connection with the Loan and Security Agreement, and as additional consideration for the Lenders agreeing to loan funds to the Company thereunder, the Company granted warrants to purchase 2.75 million shares of common stock of the Company to the Lenders (and/or their affiliates) on the Closing Date (the “Initial Warrants”). The terms of the warrants are set forth in a Warrant Agreement (the “April 2022 Warrant Agreement”) entered into on April 1, 2022, between the Company and Continental Stock Transfer & Trust Company as warrant agent.
In connection with the entry into the Amendment No. One to Loan Agreement, and as a required term and condition thereof, on May 26, 2022, the Company granted warrants (the “Additional Warrants” and together with the Initial Warrants, the “Warrants”) to purchase 250 thousand shares of the Company’s common stock to the Additional Lenders and their affiliates. The terms of the Additional Warrants are set forth in a Warrant Agreement (the “May 2022 Warrant Agreement” and together with the April 2022 Warrant Agreement, the “Warrant Agreements”) entered into on May 26, 2022, between the Company and Continental Stock Transfer & Trust Company as warrant agent.
Each holder shall have a put right to require the Company to repurchase any portion of the warrants held by such holder concurrently with the consummation of such fundamental transaction. The fundamental transaction clause requires the warrants to be classified as liabilities.
Future contractual maturitiesThe initial 2.75 million Initial Warrants were valued at April 1, 2022, the 250 thousand additional Warrants were valued at May 26, 2022 and the total 3 million warrants were revalued at June 30, 2022 using the Dynamic Black Scholes model that computes the impact of notes payable asa possible change in control transaction upon the exercise of March 31,the warrant shares at approximately $23 million, $3 million and $27 million, respectively. The Dynamic Black Scholes Merton inputs used were: expected dividend rate of 0%, expected volatility of 97%-111%, risk free interest rate of 2.61% - 3.01% and expected term of 5.5 years.
The following is an analysis of changes in the derivative liability for the six months ended June 30, 2022 are summarized as follows:(in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Creditor | Year 1 | | Year 2 | | Year 3 | | Year 4 | | Year 5 | | Thereafter |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
John Deere Note | $ | 38,460 | | | $ | 39,414 | | | $ | 6,663 | | | $ | — | | | $ | — | | | $ | — | |
AVT Equipment Lease-HH | 263,065 | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
SBA Loan | — | | | 1,266 | | | 1,315 | | | 1,365 | | | 1,417 | | | 53,337 | |
| | | | | | | | | | | |
Various institutions | 1,008,621 | | | — | | | — | | | — | | | — | | | — | |
Totals | $ | 1,310,146 | | | $ | 40,680 | | | $ | 7,978 | | | $ | 1,365 | | | $ | 1,417 | | | $ | 53,337 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | |
Level Three Roll-Forward | | | |
| | 2022 | |
Balance at beginning of period | | $ | — | | |
April 1 warrants issued | | 22,796 | | |
May 26 warrants issued | | 2,874 | | |
Value of warrants exercised | | — | | |
Change in valuation of warrants | | 945 | | |
Balance at end of period | | $ | 26,615 | | |
Indenture and Convertible Senior Notes
On November 1, 2021, we issued $155.0$155 million aggregate principal amount at maturity of our 6.25% Convertible Senior Notes due 2027 (the “Convertible Senior Notes”) pursuant to an Indenture (the “Indenture”), dated November 1, 2021, between the Company and U.S. Bank National Association, as trustee (the “Trustee”), in a private offering (the “Note Offering”) to persons reasonably believed to be “qualified institutional buyers” and/or to “accredited investors” in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended (the "Securities Act"), pursuant to Securities Purchase Agreements. The issue price iswas 90% of the face amount of each note. Interest payments on the Notes are paid semiannually on April 1 and October 1 of each year, beginning on April 1, 2022. On April 1, 2022, a total of $4,036,458$4 million of interest was paid on our outstanding Convertible Senior Notes.
A total of seventy-five percent (75%) of the net proceeds from the offering were placed into an escrow account to be released to the Company, upon the satisfaction of certain conditions, including the satisfaction or waiver of all of the conditions precedent to the Company’s obligation to consummate the Mobile Acquisition (collectively, the “Escrow Release Conditions”). The Mobile Acquisition (defined below) was consummated on April 1, 2022, and the proceeds from the sale of the Convertible Senior Notes which were held in escrow were released on April 1, 2022.
Prior to July 1, 2027, the Convertible Senior Notes will be convertible at the option of the holders of the Convertible Senior Notes only upon the satisfaction of certain conditions and during certain periods, and thereafter, at any time until the close of business on the second scheduled trading day immediately preceding the maturity date.
Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of its common stock or a combination of cash and shares of its common stock, at its election, provided that until such time as the Company’s stockholders havehad approved the issuance of more than 19.99% of our common stock issuable upon conversion of the Convertible Senior Notes in accordance with the rules of The Nasdaq Capital Market.Market, such Convertible Senior Notes were not convertible.
Initially, a maximum of 36,214,96036 million shares of common stock maycould be issued upon conversion of the Convertible Senior Notes, based on the initial maximum conversion rate of 233.6449 shares of the Company’s common stock per $1,000 principal amount of Convertible Senior Notes, which is subject to customary and other adjustments described in the Indenture.
On January 20, 2022, our shareholders approved the issuance of shares of our common stock issuable upon conversion of the Convertible Senior Notes, in accordance with Nasdaq Listing Rules 5635 (a) and (d). Accordingly, $79 million of derivative Convertible Senior Note liabilities were reclassified to additional paid in capital.
On May 26, 2022, May 27, 2022, May 31, 2022, and June 1, 2022, holders of $60 million of the Convertible Senior Notes due 2027, converted such notes into 10.2 million shares of common stock of the Company pursuant to the terms of the Indenture. The shares of common stock issued upon conversion of the $60 million in 6.25% Convertible Senior Notes due 2027 were issued in reliance upon Section 3(a)(9) of the Securities Act, as involving an exchange by the Company exclusively with its security holders. Upon the conversion, the Company recognized $33.9 million unamortized deferred loan cost and discount as interest expense.
The components of the Convertible Senior Notes are presented as follows (in thousands):
| | | | | | | | |
| | March 31,June 30, 2022 |
Principal Amounts | | $ | 155,000,000 155,000 | |
Conversion of principal into common stock | | (59,822) | |
Unamortized discount and issuance costs | | (89,213,315)(53,635) | |
Net Carrying Amount | | $ | 65,786,68541,543 | |
Our Convertible Senior Notes will mature on October 1, 2027, unless earlier repurchased, redeemed or converted. Interest is payable semiannually in arrears on April 1 and October 1 of each year, beginning on April 1, 2022. The following table represents the future interest payment.payment (in thousands):
| Interest payable | Interest payable | | Year 1 | | Year 2 | | Year 3 | | Year 4 | | Year 5 | | Thereafter | Interest payable | | Year 1 | | Year 2 | | Year 3 | | Year 4 | | Year 5 | | Thereafter |
| Interest payable | Interest payable | | $ | 9,687,500 | | | $ | 9,714,041 | | | $ | 9,687,500 | | | $ | 9,687,500 | | | $ | 9,687,500 | | | $ | 4,857,021 | | Interest payable | | $ | 6,572 | | | $ | 5,949 | | | $ | 5,949 | | | $ | 5,949 | | | $ | 5,949 | | | $ | 2,974 | |
|
NOTE 7. EARNINGS PER SHARE
Basic earnings per share includes no dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the periods presented. Diluted earnings per share reflects the potential dilution of securities that could share in the earnings of an entity, such as convertible preferred stock, stock options, warrants or convertible securities.
Due to their anti-dilutive effect, the calculation of diluted earnings per share for the three months ended March 31,June 30, 2022 and 2021 excludes: 1) options to purchase 1,153,2150.8 million and 4,065,0595.6 million shares, respectively, of common stock, 2) warrants to purchase 01.3 million and 1,983,5101.9 million shares, respectively, of common stock, 3) Series B Preferred Stock which is convertible into 0 and 2,035,666 shares, respectively, of common stock, 4) Series B1 Preferred Stock which is convertible into 0 and 5,497,450 shares, respectively, of common stock, and 5) Series A Preferred Stock which is convertible into 380,5600 and 419,8590.4 million shares of common stock, and 6) 36,214,96022.2 million shares of common stock which may be issued upon conversion of the Convertible Senior Convertible Notes, based on the initial maximum conversion rate of 233.6449 shares of the Company’s common stock per $1,000 principal amount of the Convertible Senior Convertible Notes.
In accordance with Accounting Standards Codification (ASC) 260-10-45, Share-Based Payment ArrangementsDue to their anti-dilutive effect, the calculation of diluted earnings per share for the six months ended June 30, 2022 and Participating Securities2021 excludes: 1) options to purchase 0.9 million and the Two-Class Method, our5.6 million shares, respectively, of common stock, 2) warrants to purchase 1.6 million and 1.9 million shares, respectively, of common stock, 3) Series A Preferred Stock Series C Preferred Stock,which is convertible into 0 and Series B and B1 Preferred Stock are considered participating securities. Basic earnings per common share are calculated by dividing the net income, adjusted for preferred dividends and income allocated to participating securities, by the weighted average number0.4 million shares of common stock, and 6) 22.2 million shares outstanding during the period. Diluted net income perof common share reflects the dilutions that would occur if any potential dilutive instruments were exercised or converted into common shares. The dilutive effect of participating securities is calculated using the more dilutivestock which may be issued upon conversion of the treasury stock method or two-class method. Other potentially dilutive securities include preferred stock, stock options and warrants, and restricted stock. These are included in dilutedConvertible Senior Notes, based on the initial maximum conversion rate of 233.6449 shares to the extent they are dilutive under the treasury stock method for the applicable periods. During the periods of net loss, no effect is given to the participating securities because they do not share in the losses of the Company.Company’s common stock per $1,000 principal amount of the Convertible Senior Notes.
The following is a reconciliation of the numerator and denominator for basic and diluted earnings per share for the three months and six months ended March 31,June 30, 2022 and 2021:2021 (in thousands, except per share amounts):
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| | Three Months Ended March 31, | | |
| | 2022 | | 2021 | | | | |
Basic loss per Share | | | | | | | | |
Numerator: | | | | | | | | |
Net loss available to shareholders from continuing operations | | $ | (14,961,744) | | | $ | (3,373,859) | | | | | |
Net income available to shareholders from discontinued operations, net of tax | | 9,992,889 | | | 4,008,891 | | | | | |
Net income (loss) available to common shareholders | | $ | (4,968,855) | | | $ | 635,032 | | | | | |
Denominator: | | | | | | | | |
Weighted-average common shares outstanding | | 63,372,005 | | | 47,709,450 | | | | | |
Continuing operations | | $ | (0.24) | | | $ | (0.07) | | | | | |
Discontinued operations, net of tax | | $ | 0.16 | | | $ | 0.08 | | | | | |
Basic earnings (loss) per share | | $ | (0.08) | | | $ | 0.01 | | | | | |
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Diluted Earnings per Share | | | | | | | | |
Numerator: | | | | | | | | |
Net loss available to shareholders from continuing operations | | $ | (14,961,744) | | | $ | (3,373,859) | | | | | |
Net income available to shareholders from discontinued operations, net of tax | | 9,992,889 | | | 4,008,891 | | | | | |
Net income (loss) available to common shareholders | | $ | (4,968,855) | | | $ | 635,032 | | | | | |
Denominator: | | | | | | | | |
Weighted-average shares outstanding | | 63,372,005 | | | 47,709,450 | | | | | |
Effect of dilutive securities | | | | | | | | |
Stock options and warrants | | — | | | 876,886 | | | | | |
Preferred stock | | — | | | 419,859 | | | | | |
Diluted weighted-average shares outstanding | | 63,372,005 | | | 49,006,195 | | | | | |
Continuing operations | | $ | (0.24) | | | $ | (0.07) | | | | | |
Discontinued operations, net of tax | | $ | 0.16 | | | $ | 0.08 | | | | | |
Diluted earnings (loss) per share | | $ | (0.08) | | | $ | 0.01 | | | | | |
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| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
Basic and diluted loss per Share | | | | | | | | |
Numerator: | | | | | | | | |
Net loss attributable to shareholders from continuing operations | | $ | (81,797) | | | $ | (20,472) | | | $ | (96,759) | | | $ | (23,847) | |
Net income attributable to shareholders from discontinued operations, net of tax | | 14,821 | | | 426 | | | 24,814 | | | 4,436 | |
Net loss attributable to common shareholders | | $ | (66,976) | | | $ | (20,046) | | | $ | (71,945) | | | $ | (19,411) | |
Denominator: | | | | | | | | |
Weighted-average common shares outstanding | | 67,923 | | | 52,683 | | | 65,660 | | | 50,210 | |
Continuing operations | | $ | (1.20) | | | $ | (0.39) | | | $ | (1.47) | | | $ | (0.48) | |
Discontinued operations, net of tax | | 0.22 | | | 0.01 | | | 0.38 | | | 0.09 | |
Basic and diluted loss per share | | $ | (0.98) | | | $ | (0.38) | | | $ | (1.09) | | | $ | (0.39) | |
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NOTE 8. COMMON STOCK
During the threesix months ended March 31,June 30, 2022, the Company issued 5,041386 thousand shares of common stock in connection with the conversion of Series A Convertible Preferred Stock, pursuant to the terms of such securities, and issued 1,112,7281.1 million shares of the Company's common stock in exchange for warrants to purchase 1,500,0001.5 million shares of the Company's common stock with an exercise price of $2.25 per share.share on a cashless basis, and issued 10.2 million shares of the Company's common stock in conversion of $59.8 million in Convertible Senior Notes. In addition, the Company issued 60,0000.6 million shares of common stock in connection with the exercise of options.
During the threesix months ended March 31,June 30, 2021, the Company issued 6,164,66613.8 million shares of common stock in connection with the conversion and exercises of Series A, Series B & B1 Convertible Preferred Stock and exercises of warrants into common stock of the Company, pursuant to the terms of such securities. In addition, the Company issued 22,9920.5 million shares of common stock in connection with the exercise of options.
Warrant Exchange Agreement
On March 24, 2022, the Company entered into an Exchange Agreement with Tensile Capital Partners Master Fund LP (the “Holder” and "Tensile"). Pursuant to the Exchange Agreement, the Holder agreed to exchange outstanding warrants to purchase 1,500,0001.5 million shares of the Company’s common stock with an exercise price of $2.25 per share and an expiration date of July 25, 2029, for 1,112,7281.1 million shares of the Company’s common stock, effectively resulting in a net cashless exercise of the warrants (which were cancelled in connection with the transaction), with the value of such surrendered shares based on the five day trailing volume weighted average price of the Company’s common stock.
Conversion of Convertible Senior Notes
On May 26, 2022, May 27, 2022, May 31, 2022, and June 1, 2022, holders of $59.8 million of the Company’s 6.25% Convertible Senior Notes due 2027, converted such notes into 10.2 million shares of common stock of the Company pursuant to the terms of the Indenture.
Conversion of Series A Preferred Stock
Pursuant to the designation of the rights and preferences of the Series A Convertible Preferred Stock of the Company, each share of Series A Convertible Preferred Stock is automatically converted into shares of common stock of the Company (on a one-for-one basis), automatically and without further action by the Company or any holder, upon the first to occur of certain events, including if the closing price of the Company’s common stock on the Nasdaq Capital Market averages at least $15.00 per share over a period of 20 consecutive trading days and the daily trading volume over the same 20-day period averages at least 7,500 shares (the “Automatic Conversion Provision”).
Effective on June 10, 2022, the Automatic Conversion Provision of the Series A Convertible Preferred Stock was triggered, and the 374,337 outstanding shares of the Company’s Series A Convertible Preferred Stock automatically converted into 374,337 shares of common stock of the Company and on June 10, 2022, all rights of any holder with respect to the shares of the Series A Convertible Preferred Stock so converted, including the rights, if any, to receive distributions of the Company’s assets terminated, except only for the rights of such holders to receive certificates for the number of whole shares of common stock into which such shares of the Series A Convertible Preferred Stock were converted.
NOTE 9. PREFERRED STOCK AND DETACHABLE WARRANTS
The total number of authorized shares of the Company’s preferred stock is 50,000,00050 million shares, $0.001 par value per share. The total number of designated shares of the Company’s Series A Convertible Preferred Stock is 5,000,0005 million (“Series A Preferred”). The total number of designated shares of the Company’s Series B Convertible Preferred Stock is 10,000,000.10 million. The total number of designated shares of the Company’s Series B1 Convertible Preferred Stock is 17,000,000.17 million. The total number of designated shares of Series C Convertible Preferred Stock is 44,000. As of March 31,June 30, 2022 and December 31, 2021, there were 380,5600 and 385,601386 thousand shares, respectively, of Series A Preferred Stock issued and outstanding. As of March 31,June 30, 2022 and December 31, 2021, there were 0no shares of Series B , B1 and B1C Preferred Stock outstanding, respectively.
Series B Preferred Stock and Temporary Equity
The following table represents the activity related to the Series B Preferred Stock, classified as Temporary Equity for the three months ended March 31, 2021:
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| | | March 31, 2021 |
Balance at beginning of period | | | $ | 12,718,339 | |
Less: conversions of shares to common | | | (1,978,494) | |
Less: exchanges of shares to common | | | (4,747,250) | |
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Plus: dividends in kind | | | 317,970 | |
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Balance at end of period | | | $ | 6,310,565 | |
During the three months ended March 31, 2021 we paid dividends in-kind in additional shares of Series B Preferred Stock of $317,970. Because such preferred stock was not redeemed on June 24, 2020, the preferred stock accrued a 10% per annum dividend (payable in-kind at the option of the Company), until such preferred stock was redeemed or converted into common stock. Effective on June 25, 2021, the automatic conversion provisions of the Series B Preferred Stock were triggered, and the outstanding shares of the Company’s Series B Preferred Stock automatically converted into common stock of the Company.
Series B1 Preferred Stock and Temporary Equityoutstanding.
The following table represents the activity related to the Series B1 Preferred Stock, classified as Temporary Equity, for the three months ended March 31, 2021:
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Balance at beginning of period | | | $ | 11,036,173 | |
Less: conversions of shares to common | | | (3,256,024) | |
Plus: discount accretion | | | 223,727 | |
Plus: dividends in kind | | | 288,594 | |
Balance at end of period | | | $ | 8,292,470 | |
During the three months ended March 31, 2021 we paid dividends in-kind in additional shares of Series B1 Preferred Stock of 288,594. Because such preferred stock was not redeemed on June 24, 2020, the preferred stock accrued a 10% per annum dividend (payable in-kind at the option of the Company), until such preferred stock was redeemed or converted into common stock. Effective on June 24, 2021, the automatic conversion provisions of the Series B1 Preferred Stock were triggered, and the outstanding shares of the Company’s Series B1 Preferred Stock automatically converted into common stock of the Company.
The following is an analysis of changes in the derivative liability for the three months ended March 31, 2021:
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Level Three Roll-Forward | | | |
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Balance at beginning of period | | | $ | 330,412 | |
Value of warrants exercised | | | (1,105,935) | |
Change in valuation of warrants | | | 1,780,203 | |
Balance at end of period | | | $ | 1,004,680 | |
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The Series B Warrants expired pursuant to their terms on December 24, 2020. The Series B1 Warrants expired pursuant to their terms on November 13, 2021.
NOTE 10. SEGMENT REPORTING
The Company’s reportable segments include the (1) Black Oil, (2) Refining and Marketing, and (3) Recovery segments.
(1) The Black Oil segment consists primarily of the sale of (a) petroleum products which include base oil and industrial fuels—which consist of used motor oils, cutterstock and fuel oil generated by our facilities; (b) oil collection services—which consist of used oil sales, burner fuel sales, antifreeze sales and service charges; (c) the sale of other re-refinery products including asphalt, condensate, recovered products, and used motor oil; (d) transportation revenues; and (e) the sale of VGO (vacuum gas oil)/marine fuel.
(2) The Refining and Marketing segment consists primarily of the sale of pygas;gasoline, diesel and jet fuel produced at our Mobile refinery as well as pygas and industrial fuels, which are produced at a third-party facility; and distillates.facility.
(3) The Recovery segment consists primarily of revenues generated from the sale of ferrous and non-ferrous recyclable Metal(s) products that are recovered from manufacturing and consumption. It also includes revenues generated from trading/marketing of Group III Base Oils.
We also disaggregate our revenue by product category for each of our segments, as we believe such disaggregation helps depict how our revenue and cash flows are affected by economic factors.
Segment information for the three and six months ended March 31,June 30, 2022 and 2021 is as follows:follows (in thousands):
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THREE MONTHS ENDED MARCH 31, 2022 |
| | Black Oil | | Refining & Marketing | | Recovery | | Total |
Revenues: | | | | | | | | |
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Pygas | | $ | — | | | $ | 4,690,268 | | | $ | — | | | $ | 4,690,268 | |
Industrial fuel | | — | | | 572,281 | | | — | | | 572,281 | |
Distillates (1) | | — | | | 29,456,369 | | | — | | | 29,456,369 | |
Oil collection services | | 213,536 | | | — | | | | | 213,536 | |
Metals (2) | | — | | | — | | | 3,414,286 | | | 3,414,286 | |
Other re-refinery products (3) | | — | | | — | | | 533,305 | | | 533,305 | |
VGO/Marine fuel sales | | 1,336,751 | | | — | | | — | | | 1,336,751 | |
Total revenues | | 1,550,287 | | | 34,718,918 | | | 3,947,591 | | | 40,216,796 | |
Cost of revenues (exclusive of depreciation and amortization shown separately below) | | 1,649,972 | | | 33,086,160 | | | 3,829,352 | | | 38,565,484 | |
Depreciation and amortization attributable to costs of revenues | | 16,411 | | | 23,370 | | | 74,272 | | | 114,053 | |
Gross profit (loss) | | (116,096) | | | 1,609,388 | | | 43,967 | | | 1,537,259 | |
Selling, general and administrative expenses | | 7,411,220 | | | 1,124,336 | | | 246,839 | | | 8,782,395 | |
Depreciation and amortization attributable to operating expenses | | 26,916 | | | — | | | — | | | 26,916 | |
Income (loss) from operations | | $ | (7,554,232) | | | $ | 485,052 | | | $ | (202,872) | | | $ | (7,272,052) | |
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THREE MONTHS ENDED JUNE 30, 2022 |
| | Black Oil | | Refining & Marketing | | Recovery | | Total |
Revenues: | | | | | | | | |
Gasolines | | $ | — | | | $ | 255,909 | | | $ | — | | | $ | 255,909 | |
Jet Fuels | | — | | | 143,688 | | | — | | | 143,688 | |
Diesel | | — | | | 322,317 | | | — | | | 322,317 | |
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Pygas | | — | | | 20,685 | | | — | | | 20,685 | |
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Oil collection services | | 26 | | | — | | | — | | | 26 | |
Metals (1) | | — | | | — | | | 4,318 | | | 4,318 | |
Other refinery products (2) | | 666 | | | 72,460 | | | 877 | | | 74,003 | |
VGO/Marine fuel sales | | 19,562 | | | 151,331 | | | — | | | 170,893 | |
Total revenues | | 20,254 | | | 966,390 | | | 5,195 | | | 991,839 | |
Cost of revenues (exclusive of depreciation and amortization shown separately below) | | 20,147 | | | 959,767 | | | 4,528 | | | 984,442 | |
Depreciation and amortization attributable to costs of revenues | | 31 | | | 3,009 | | | 82 | | | 3,122 | |
Gross profit | | 76 | | | 3,614 | | | 585 | | | 4,275 | |
Selling, general and administrative expenses | | 12,027 | | | 23,597 | | | 1,017 | | | 36,641 | |
Depreciation and amortization attributable to operating expenses | | 27 | | | 736 | | | — | | | 763 | |
Loss from operations | | $ | (11,978) | | | $ | (20,719) | | | $ | (432) | | | $ | (33,129) | |
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| THREE MONTHS ENDED MARCH 31, 2021 | |
THREE MONTHS ENDED JUNE 30, 2021 | | THREE MONTHS ENDED JUNE 30, 2021 |
| | | Black Oil | | Refining & Marketing | | Recovery | | Total | | Black Oil | | Refining & Marketing | | Recovery | | Total |
Revenues: | Revenues: | | | | | | | Revenues: | | | | | | |
Gasolines | | Gasolines | | $ | — | | | $ | 6,083 | | | $ | — | | | $ | 6,083 | |
| Diesel | | Diesel | | — | | | 13,481 | | | — | | | 13,481 | |
| Pygas | Pygas | | $ | — | | | $ | 2,972,431 | | | $ | — | | | $ | 2,972,431 | | Pygas | | — | | | 3,862 | | | — | | | 3,862 | |
Industrial fuel | Industrial fuel | | — | | | 311,693 | | | — | | | 311,693 | | Industrial fuel | | — | | | 410 | | | — | | | 410 | |
Distillates (1) | | — | | | 15,989,828 | | | — | | | 15,989,828 | | |
Oil collection services | Oil collection services | | 122,986 | | | — | | | 3,423 | | | 126,409 | | Oil collection services | | 155 | | | — | | | — | | | 155 | |
Metals (2) | | — | | | — | | | 5,644,882 | | | 5,644,882 | | |
Other re-refinery products (3) | | — | | | — | | | — | | | — | | |
VGO/Marine fuel sales | | — | | | — | | | — | | | — | | |
Metals (1) | | Metals (1) | | — | | | — | | | 6,151 | | | 6,151 | |
Other refinery products (2) | | Other refinery products (2) | | — | | | — | | | 86 | | | 86 | |
| Total revenues | Total revenues | | 122,986 | | | 19,273,952 | | | 5,648,305 | | | 25,045,243 | | Total revenues | | 155 | | | 23,836 | | | 6,237 | | | 30,228 | |
Cost of revenues (exclusive of depreciation and amortization shown separately below) | Cost of revenues (exclusive of depreciation and amortization shown separately below) | | 280,378 | | | 17,949,695 | | | 4,578,630 | | | 22,808,703 | | Cost of revenues (exclusive of depreciation and amortization shown separately below) | | 363 | | | 22,248 | | | 5,430 | | | 28,041 | |
Depreciation and amortization attributable to costs of revenues | Depreciation and amortization attributable to costs of revenues | | 20,382 | | | 31,876 | | | 60,239 | | | 112,497 | | Depreciation and amortization attributable to costs of revenues | | 19 | | | 31 | | | 66 | | | 116 | |
Gross profit (loss) | Gross profit (loss) | | (177,774) | | | 1,292,381 | | | 1,009,436 | | | 2,124,043 | | Gross profit (loss) | | (227) | | | 1,557 | | | 741 | | | 2,071 | |
Selling, general and administrative expenses | Selling, general and administrative expenses | | 1,942,399 | | | 759,409 | | | 156,254 | | | 2,858,062 | | Selling, general and administrative expenses | | 3,281 | | | 687 | | | 209 | | | 4,177 | |
Depreciation and amortization attributable to operating expenses | Depreciation and amortization attributable to operating expenses | | 26,916 | | | — | | | — | | | 26,916 | | Depreciation and amortization attributable to operating expenses | | 27 | | | — | | | — | | | 27 | |
Income (loss) from operations | Income (loss) from operations | | $ | (2,147,089) | | | $ | 532,972 | | | $ | 853,182 | | | $ | (760,935) | | Income (loss) from operations | | $ | (3,535) | | | $ | 870 | | | $ | 532 | | | $ | (2,133) | |
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SIX MONTHS ENDED JUNE 30, 2022 |
| | Black Oil | | Refining & Marketing | | Recovery | | Total |
Revenues: | | | | | | | | |
Gasoline | | $ | — | | | $ | 263,458 | | | $ | — | | | $ | 263,458 | |
Jet Fuels | | — | | | 143,688 | | | — | | | 143,688 | |
Diesel | | — | | | 344,225 | | | — | | | 344,225 | |
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Pygas | | — | | | 25,375 | | | — | | | 25,375 | |
Industrial fuel | | — | | | 572 | | | — | | | 572 | |
Oil collection services | | 240 | | | — | | | — | | | 240 | |
Metals (1) | | — | | | — | | | 7,733 | | | 7,733 | |
Other refinery products (2) | | 666 | | | 72,460 | | | 1,410 | | | 74,536 | |
VGO/Marine fuel sales | | 20,898 | | | 151,331 | | | — | | | 172,229 | |
Total revenues | | 21,804 | | | 1,001,109 | | | 9,143 | | | 1,032,056 | |
Cost of revenues (exclusive of depreciation and amortization shown separately below) | | 21,797 | | | 992,854 | | | 8,357 | | | 1,023,008 | |
Depreciation and amortization attributable to costs of revenues | | 47 | | | 3,033 | | | 156 | | | 3,236 | |
Gross profit (loss) | | (40) | | | 5,222 | | | 630 | | | 5,812 | |
Selling, general and administrative expenses | | 19,438 | | | 24,721 | | | 1,264 | | | 45,423 | |
Depreciation and amortization attributable to operating expenses | | 54 | | | 736 | | | — | | | 790 | |
Loss from operations | | $ | (19,532) | | | $ | (20,235) | | | $ | (634) | | | $ | (40,401) | |
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SIX MONTHS ENDED JUNE 30, 2021 |
| | Black Oil | | Refining & Marketing | | Recovery | | Total |
Revenues: | | | | | | | | |
Gasoline | | $ | — | | | $ | 10,494 | | | $ | — | | | $ | 10,494 | |
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Diesel | | — | | | 25,060 | | | — | | | 25,060 | |
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Pygas | | — | | | 6,835 | | | — | | | 6,835 | |
Industrial fuel | | — | | | 721 | | | — | | | 721 | |
Oil collection services | | 278 | | | — | | | 3 | | | 281 | |
Metals (1) | | — | | | — | | | 11,796 | | | 11,796 | |
Other refinery products (2) | | — | | | — | | | 86 | | | 86 | |
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Total revenues | | 278 | | | 43,110 | | | 11,885 | | | 55,273 | |
Cost of revenues (exclusive of depreciation and amortization shown separately below) | | 643 | | | 40,198 | | | 10,009 | | | 50,850 | |
Depreciation and amortization attributable to costs of revenues | | 39 | | | 63 | | | 126 | | | 228 | |
Gross profit (loss) | | (404) | | | 2,849 | | | 1,750 | | | 4,195 | |
Selling, general and administrative expenses | | 5,223 | | | 1,447 | | | 365 | | | 7,035 | |
Depreciation and amortization attributable to operating expenses | | 54 | | | — | | | — | | | 54 | |
Income (loss) from operations | | $ | (5,681) | | | $ | 1,402 | | | $ | 1,385 | | | $ | (2,894) | |
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(1) Distillates are finished fuel products such as gasoline and diesel fuels.
(2) Metals consist of recoverable ferrous and non-ferrous recyclable metals from manufacturing and consumption. Scrap metal can be recovered from pipes, barges, boats, building supplies, surplus equipment, tanks, and other items consisting of metal composition. These materials are segregated, processed, cut-up and sent back to a steel mill for re-purposing.
(3)(2) Other re-refinery products include the sales of asphalt, condensate, recovered products, and other petroleum products.
NOTE 11. INCOME TAXES
Our effective tax rate of 0% on pretax income differs from the U.S. federal income tax rate of 21% because of the change in our valuation allowance.
The year to date loss at March 31,June 30, 2022 puts the Company in an accumulated loss position for the cumulative 12 quarters then ended. For tax reporting purposes, we have net operating losses (“NOLs”) of approximately $85.6$146 million as of March 31,June 30, 2022 that are available to reduce future taxable income. In determining the carrying value of our net deferred tax asset, the Company considered all negative and positive evidence. The Company has generated pre-tax loss of approximately $0.8$65 million from January 1, 2022 through March 31,June 30, 2022.
NOTE 12. COMMODITY DERIVATIVE INSTRUMENTS
The Company utilizes derivative instruments to manage its exposure to fluctuations in the underlying commodity prices of its inventory. The Company’s management sets and implements hedging policies, including volumes, types of instruments and counterparties, to support oil prices at targeted levels and manage its exposure to fluctuating prices.
The Company’s derivative instruments consist of option and futures arrangements for oil. For option and futures arrangements, the Company receives the difference positive or negative between an agreed-upon strike price and the market price.
The mark-to-market effects of these contracts as of March 31,June 30, 2022 and December 31, 2021, are summarized in the following table. The notional amount is equal to the total net volumetric derivative position during the period indicated. The fair value of the crude oil futures agreements is based on the difference between the strike price and the New York Mercantile Exchange and Brent Complex futures price for the applicable trading months.
| As of March 31, 2022 | |
As of June 30, 2022 | | As of June 30, 2022 |
Contract Type | Contract Type | Contract Period | Weighted Average Strike Price (Barrels) | | Remaining Volume (Barrels) | Fair Value | Contract Type | Contract Period | Weighted Average Strike Price (Barrels) | | Remaining Volume (Barrels) | Fair Value |
| | | | | | (in thousands) |
| Swap | | Swap | Aug. 2022- Oct. 2022 | $ | 14.77 | | | 3,220 | | $ | (47,773) | |
Options | Options | Mar 2022 - May 2022 | $ | 4.83 | | | 20,000 | | $ | 230,200 | | Options | Aug 2022 - Aug 2022 | $ | 6.98 | | | 63 | | $ | 1,048 | |
Futures | Futures | Mar 2022 - Jun 2022 | $ | 28.27 | | | 136,000 | | $ | 133,390 | | Futures | Aug 2022 - Aug 2022 | $ | 45.79 | | | 15 | | $ | (17) | |
Futures | | Futures | Sep 2022 - Sep 2022 | $ | 44.42 | | | 13 | | $ | 41 | |
Futures | | Futures | June 2022 - June 2022 | $ | 47.79 | | | 9 | | $ | 165 | |
|
| As of December 31, 2021 | As of December 31, 2021 | As of December 31, 2021 |
Contract Type | Contract Type | Contract Period | Weighted Average Strike Price (Barrels) | | Remaining Volume (Barrels) | Fair Value | Contract Type | Contract Period | Weighted Average Strike Price (Barrels) | | Remaining Volume (Barrels) | Fair Value |
| | | | | | (in thousands) |
Options | Options | Dec. 2021-Mar. 2022 | $ | 3.18 | | | 18,000 | | $ | 136,440 | | Options | Dec. 2021-Mar. 2022 | $ | 3.18 | | | 18 | | $ | 136 | |
Futures | Futures | Dec. 2021-Mar. 2022 | $ | 31.59 | | | 20,000 | | $ | 71,000 | | Futures | Dec. 2021-Mar. 2022 | $ | 31.59 | | | 20 | | $ | 71 | |
Futures | Futures | Dec. 2021-Mar. 2022 | $ | 32.48 | | | 50,000 | | $ | (111,460) | | Futures | Dec. 2021-Mar. 2022 | $ | 32.48 | | | 50 | | $ | (111) | |
|
The carrying values of the Company’s derivatives positions and their locations on the consolidated balance sheets as of March 31,June 30, 2022 and December 31, 2021 are presented in the table below.
| | | | | | | | | | | |
Balance Sheet Classification | Contract Type | 2022 | 2021 |
| | | |
| Crude oil options | $ | 230,200 | | $ | 136,440 | |
| Crude oil futures | $ | 133,390 | | $ | (40,460) | |
Derivative commodity asset | | $ | 363,590 | | $ | 95,980 | |
| | | | | | | | | | | |
Balance Sheet Classification | Contract Type | 2022 | 2021 |
| | | |
| Crude oil options | $ | 1,048 | | $ | 136 | |
| Crude oil swaps | (47,773) | | — | |
| Crude oil futures | 189 | | (40) | |
Derivative commodity assets (liabilities) | | $ | (46,536) | | $ | 96 | |
For the three months ended March 31,June 30, 2022 and 2021, we recognized $257,516 of gain$94.3 million and $721,531$1 million of loss, respectively, on commodity derivative contracts on the consolidated statements of operations as part of our cost of revenues.
F-22For the six months ended June 30, 2022 and 2021, we recognized $93.7 million and $1.9 million of loss, respectively, on commodity derivative contracts on the consolidated statements of operations as part of our cost of revenues.
NOTE 13. LEASES
Finance Leases
FinanceOn April 1, 2022, the Company entered into one finance lease and the balance of finance lease right-of-use lease assets are included in assets held for sale, and finance lease liabilities are included in finance lease short-term liability on the unaudited consolidated balance sheets. is $44.4 million at June 30, 2022. The associated amortization expenses for the three months ended March 31,June 30, 2022 and 2021 were $0$0.8 million and $1,086,$1.1 thousand, respectively, and are included in depreciation and amortization on the unaudited consolidated statements of operations. The associated interest expense for the three months ended March 31,June 30, 2022 and 2021 were $6,134$0.8 million and $9,303,$14 thousand, respectively, and are included in interest expense on the unaudited consolidated statements of operations. The associated amortization expenses for the six months ended June 30, 2022 and 2021 were $0.8 million and $2.2 thousand, respectively, and are included in depreciation and amortization on the unaudited consolidated statements of operations. The associated interest expense for the six months ended June 30, 2022 and 2021 were $1.4 million and $23 thousand, respectively, and are included in interest expense on the unaudited consolidated statements of operations. Please see “Note 6. Financing Arrangements” for more details.Operating Leases
Operating leases are included in operating lease right-of-use lease assets, and operating current and long-term lease liabilities on the consolidated balance sheets. Lease expense for operating leases is recognized on a straight-line basis over the lease term. Variable lease expense is recognized in the period in which the obligation for those payments is incurred. Lease expense for equipment is included in cost of revenues and other rents are included in selling, general and administrative expense on the unaudited consolidated statements of operations and are reported net of lease income. Lease income is not material to the results of operations for the three and six months ended March 31,June 30, 2022 and 2021. Total operating lease costs for both the three months ended March 31,June 30, 2022 and 2021 were $240,000$0.25 million and $207,000,$0.2 million, respectively. Total operating lease costs for both the six months ended June 30, 2022 and 2021 were $0.5 million and $0.4 million, respectively.
Cash Flows
Cash paid for amounts included in operating lease liabilities was $0.2$0.5 million and $0.2$0.4 million during the threesix months ended March 31,June 30, 2022 and 2021, and is included in operating cash flows. Cash paid for amounts included in finance lease was $39,101$107 thousand and $67,382$134 thousand during the threesix months ended March 31,June 30, 2022 and 2021, respectively, and is included in financing cash flows.
Maturities of our lease liabilities for all operating leases are as follows as of March 31, 2022:June 30, 2022 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | |
March 31, 2022 |
| Facilities | | Equipment | | Plant | | | | Total |
Year 1 | $ | 250,849 | | | $ | 7,500 | | | $ | 701,224 | | | | | $ | 959,573 | |
Year 2 | 142,660 | | | 7,500 | | | 701,224 | | | | | 851,384 | |
Year 3 | 60,534 | | | 7,500 | | | 701,224 | | | | | 769,258 | |
Year 4 | 16,000 | | | 625 | | | 701,224 | | | | | 717,849 | |
Year 5 | — | | | — | | | 701,224 | | | | | 701,224 | |
Thereafter | — | | | — | | | 3,506,120 | | | | | 3,506,120 | |
Total lease payments | $ | 470,043 | | | $ | 23,125 | | | $ | 7,012,240 | | | | | $ | 7,505,408 | |
Less: interest | (41,988) | | | (1,956) | | | (2,570,210) | | | | | (2,614,154) | |
Present value of operating lease liabilities | $ | 428,055 | | | $ | 21,169 | | | $ | 4,442,030 | | | | | $ | 4,891,254 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
June 30, 2022 |
| Facilities | | Equipment | | Plant | | | | Total |
Year 1 | $ | 244 | | | $ | 8 | | | $ | 702 | | | | | $ | 954 | |
Year 2 | 105 | | | 7 | | | 701 | | | | | 813 | |
Year 3 | 47 | | | 6 | | | 701 | | | | | 754 | |
Year 4 | 11 | | | — | | | 701 | | | | | 712 | |
Year 5 | — | | | — | | | 701 | | | | | 701 | |
Thereafter | — | | | — | | | 3,331 | | | | | 3,331 | |
Total lease payments | 407 | | | 21 | | | 6,837 | | | | | 7,265 | |
Less: interest | (33) | | | (1) | | | (2,462) | | | | | (2,496) | |
Present value of operating lease liabilities | $ | 374 | | | $ | 20 | | | $ | 4,375 | | | | | $ | 4,769 | |
The weighted average remaining lease terms and discount rates for all of our operating leases were as follows as of March 31,June 30, 2022:
| | | | | | | | |
Remaining lease term and discount rate: | | March 31,June 30, 2022 |
Weighted average remaining lease terms (years) | | |
Lease facilities | | 1.871.62 |
Lease equipment | | 3.082.84 |
Lease plant | | 10.009.37 |
| | |
Weighted average discount rate | | |
Lease facilities | | 8.009.16 | % |
Lease equipment | | 8.00 | % |
Lease plant | | 9.37 | % |
| | |
The plant lease has multiple 5-year extension options for a total of 20 years. The extension option has been included in the lease right-of-use asset and lease obligation.
The Company will reassess the lease terms and purchase options when there is a significant change in circumstances or when the Company elects to exercise an option that had previously been determined that it was not reasonably certain to do so.
NOTE 14. SHARE PURCHASE, AND SUBSCRIPTION AGREEMENTS AND MOBILE REFINERY ACQUISITION
Completion of Myrtle Grove Share Purchase and Subscription Agreement
On April 1, 2022, the Company, through Vertex Splitter Corporation (“Vertex Splitter”), a wholly-owned subsidiary of the Company acquired the 15% noncontrolling interest of Vertex Refining Myrtle Grove LLC (“MG SPV”) held by Tensile-Myrtle Grove Acquisition Corporation (“Tensile-MG”), an affiliate of Tensile Capital Partners Master Fund LP, an investment fund based in San Francisco, California (“Tensile”) from Tensile-Vertex for $7.2 million, which was based on the value of the Class B Unit preference of MG SPV was owned 85.00% by Vertex Operating and 15.00%held by Tensile-MG, at March 31, 2022. At March 31, 2022, $0.10 million reportedplus capital invested by Tensile-MG in MG SPV (which had not been returned as of the date of payment), plus cash and cash equivalents onheld by Tensile-MG as of the balance sheet is restricted toclosing date. As a result, the Company acquired 100% of MG Refinery investments or operating expenses.SPV, which in turn owns the Company’s Belle Chasse, Louisiana, re-refining complex.
Myrtle Grove Redeemable Noncontrolling Interest
In accordance with ASC 480-10-S99-3A, the Company applied a two-step approach to measure noncontrolling interests associated with MG SPV at the balance sheet date. First, the Company applied the measurement guidance in ASC 810-10 by attributing a portion of the subsidiary’s net loss of $38,219$38 thousand to the noncontrolling interest. Second, the Company applied the subsequent measurement guidance in ASC 480-10-S99-3A, which indicates that the noncontrolling interest’s carrying amount is the higher of (1) the cumulative amount that would result from applying the measurement guidance in ASC 810-10 in the first step or (2) the redemption value. Pursuant to ASC 480-10-S99-3A, for a security that is probable of becoming redeemable in the future, the Company adjusted the carrying amount of the redeemable noncontrolling interests to what would
be the redemption value assuming the security was redeemable at the balance sheet date. This accretion adjustment of $421,399$0.4 million increased the carrying amount of redeemable noncontrolling interests to the redemption value as of March 31,April 1, 2022 of $7,195,260.$7.2 million. Adjustments to the carrying amount of redeemable noncontrolling interests to redemption value are reflected in retained earnings.
The table below presents the reconciliation of changes in redeemable noncontrolling interest relating to MG SPV as of March 31,June 30, 2022 and 2021.2021 (in thousands):
| | | March 31, 2022 | March 31, 2021 | | | June 30, 2022 | June 30, 2021 | |
Beginning balance | Beginning balance | $ | 6,812,080 | | $ | 5,472,841 | | | Beginning balance | $ | 6,812 | | $ | 5,473 | | |
| Net loss attributable to redeemable non-controlling interest | Net loss attributable to redeemable non-controlling interest | (38,219) | | (65,901) | | | Net loss attributable to redeemable non-controlling interest | (38) | | (129) | | |
| Accretion of non-controlling interest to redemption value | Accretion of non-controlling interest to redemption value | 421,399 | | 373,748 | | | Accretion of non-controlling interest to redemption value | 428 | | 762 | | |
Redemption of non-controlling interest | | Redemption of non-controlling interest | (7,202) | | 0 | |
Ending balance | Ending balance | $ | 7,195,260 | | $ | 5,780,688 | | | Ending balance | $ | — | | $ | 6,106 | | |
Completion of Heartland Purchase Agreement
On April 1,May 26, 2022, the Company, through Vertex Splitter acquired a 15%the 65% noncontrolling interest in MG SPV from Tensile for $7.2 million.
Heartland Share Purchase and Subscription Agreement
Theof Heartland SPV is currently owned 35% by Vertex Operating and 65%held by Tensile-Heartland Acquisition Corporation ("Tensile-Heartland"from Tensile-Vertex Holdings LLC (“Tensile-Vertex”), an affiliate of Tensile. Heartland SPV is managed by a 5-member BoardTensile for $43.5 million, which was based on the value of Managers, of which 3 members are appointed by Tensile-Heartland and 2 are appointed by the Company.
Heartland Variable interest entity
The Company has assessed the Heartland SPV under the variable interest guidance in ASC 810, and concluded that Heartland SPV is a variable interest entity. The Company’s consolidated financial statements include the assets, liabilities and results of operationsClass B Unit preference of Heartland SPV for whichheld by Tensile-Heartland, plus capital invested by Tensile-Heartland in Heartland SPV (which had not been returned as of the date of payment), plus cash and cash equivalents held by Tensile-Heartland as of the closing date. As a result, the Company is the primary beneficiary. The other equity holders’ interests are reflected in net loss attributable to noncontrolling interests and redeemable noncontrolling interest in the consolidated statements of income and redeemable noncontrolling interests in the consolidated balance sheets.
The following table summarizes the carrying amounts of Heartland SPV’s assets and liabilities included in assets held for sale and liabilities held for sale in the Company’s consolidated balance sheets at March 31, 2022 and December 31, 2021:
| | | | | | | | |
| March 31, 2022 | December 31, 2021 |
Cash and cash equivalents | $ | 17,089,714 | | $ | 13,322,507 | |
Accounts receivable, net | 10,103,011 | | 7,078,559 | |
| | |
Inventory | 1,369,203 | | 1,654,706 | |
Prepaid expense and other current assets | 7,729,233 | | 8,078,890 | |
Total current assets | 36,291,161 | | 30,134,662 | |
| | |
Fixed assets, net | 7,068,164 | | 7,404,375 | |
Finance lease right-of-use assets | 391,483 | | 436,039 | |
Operating lease right-of-use assets | 110,028 | | 166,362 | |
Intangible assets, net | 750,985 | | 813,713 | |
Other assets | 106,643 | | 106,643 | |
Total assets | $ | 44,718,464 | | $ | 39,061,794 | |
| | |
Accounts payable | $ | 2,393,475 | | $ | 2,051,721 | |
Accrued expenses | 1,232,177 | | 1,658,427 | |
Finance lease liability-current | 236,890 | | 295,935 | |
Operating lease liability-current | 110,028 | | 166,362 | |
| | |
| | |
| | |
| | |
Total liabilities | $ | 3,972,570 | | $ | 4,172,445 | |
The assetsacquired 100% of Heartland SPV, may only be used to settle the obligations of Heartland SPV, and may not be used for other consolidated entities. The liabilities of Heartland SPV are non-recourse to the general credit ofwhich in turn owns the Company’s other consolidated entities.
Columbus, Ohio, re-refining complex.
Heartland Redeemable Noncontrolling Interest
In accordance with ASC 480-10-S99-3A, the Company applied a two-step approach to measure noncontrolling interests associated with Heartland SPV at the balance sheet date. First, the Company applied the measurement guidance in ASC 810-10 by attributing a portion of the subsidiary’s net income of $3,806,753$6.8 million to the noncontrolling interest. Second, the Company applied the subsequent measurement guidance in ASC 480-10-S99-3A, which indicates that the noncontrolling interest’s carrying amount is the higher of (1) the cumulative amount that would result from applying the measurement guidance in ASC 810-10 in the first step or (2) the redemption value. At March 31,May 26, 2022, the cumulative amount resulting from the application of the measurement guidance in ASC 810-10 exceededwas $43.5 million. On May 26, 2022, the redemption value of $34,365,273.Company acquired a 65% interest in Heartland SPV from Tensile for $43.5 million.
The table below presents the reconciliation of changes in redeemable noncontrolling interest relating to Heartland SPV as of March 31,June 30, 2022 and 2021.2021 (in thousands):
| | | March 31, 2022 | March 31, 2021 | | June 30, 2022 | June 30, 2021 |
Beginning balance | Beginning balance | $ | 36,634,604 | | $ | 26,138,833 | | Beginning balance | $ | 36,635 | | $ | 26,139 | |
| Net income attributable to redeemable non-controlling interest | Net income attributable to redeemable non-controlling interest | 3,806,753 | | 1,608,303 | | Net income attributable to redeemable non-controlling interest | 6,829 | | 4,783 | |
Accretion of non-controlling interest to redemption value | — | | — | | |
Redemption of non-controlling interest | | Redemption of non-controlling interest | (43,464) | | — | |
Ending balance | Ending balance | $ | 40,441,357 | | $ | 27,747,136 | | Ending balance | $ | — | | $ | 30,922 | |
The amount of accretion of redeemable noncontrolling interest to redemption value of $421,399$0.4 million and $373,748$0.8 million are presented as an adjustment to net income (loss) attributable to Vertex Energy, Inc., to arrive at net income (loss) availableattributable to common shareholders on the consolidated statements of operations which represent the MG SPV and Heartland SPV accretion of redeemable noncontrolling interest to redemption value combined for the threesix months ended March 31,June 30, 2022 and 2021, respectively.
Heartland and Myrtle Grove Purchase AgreementsMobile Refinery Acquisition
On February 25,April 1, 2022, Vertex Splitter entered into (1) Operating assigned its rights to the May 26, 2021 Sale and Purchase Agreement between Vertex Operating and Equilon Enterprises LLC d/b/a PurchaseShell Oil Products US, Shell Oil Company and Sale Agreement with Tensile-Vertex Holdings LLCShell Chemical LP, subsidiaries of Shell plc (“Tensile-VertexShell”), an affiliate of Tensile and Tensile-Heartland (the “HeartlandRefinery Purchase Agreement”);, to Vertex Refining and (2)on the same date, Vertex Refining completed the acquisition of a Purchase and Sale Agreement with Tensile-Vertex and Tensile-MGMobile, Alabama refinery (the “Myrtle Grove Purchase Agreement”, and together with the Heartland Purchase Agreement, the “Purchase AgreementsMobile Refinery”) from Shell (the “Mobile Acquisition”).
As discussed above, Tensile-Heartland holds 65% On the Effective Date, a total of Heartland SPV and Tensile-MG owned 15% of MG SPV, and Tensile-Vertex holds 100% of both Tensile-Heartland and Tensile-MG.
Pursuant to$75 million (less $10 million previously paid) was paid by Vertex Refining in consideration for the Heartland Purchase Agreement, the Company, through Vertex Splitter, agreed to acquire 100%acquisition of the outstanding securities of Tensile-Heartland and pursuant to the Myrtle Grove Purchase Agreement, the Company, through Vertex Splitter, agreed to acquire 100% of the outstanding securities of Tensile-MG, from Vertex-Tensile, the result ofMobile Refinery, which will be that Vertex Splitter will own 100% of each of Heartland SPV and MG SPV.
Pursuant to the Heartland Purchase Agreement, the purchase price payable by Vertex Splitter to Vertex-Tensile, for 100% of Tensile-Heartlandamount is $35 million (the “Base Amount”), plus an amount accrued and accruing from and after May 31, 2021, on the Base Amount on a daily basis at the rate of 22.5% per annum compounded on the last day of each calendar quarter plus an amount equal to any and all cash and cash equivalents of Tensile-Heartland, as of the closing date, which we currently anticipate will total an aggregate of approximately $44 million. The purchase contemplated by the Heartland Purchase Agreement is required to take place on June 30, 2022, or earlier as mutually agreed by the parties, subject to customary conditionspurchase price adjustments and reimbursement for certain capital expenditures in the amount of approximately $0.4 million, $15.9 million was paid to closing. The Heartland Purchase Agreement includes customary representations of the parties, requires Vertex SplitterShell for previously agreed upon capital expenditures and miscellaneous prepaid and reimbursable items, and $130 million was paid to maintain officer and director insurance for Tensile-Heartland for at least six years following the closing; requires that they bear their own fees and expenses, except that each party is required to pay the fees and expenses of the other party upon termination of the agreement in certain situations; includes customary indemnification obligations; and includes mutual releases of the parties, effective upon closing.
The Heartland Purchase Agreement may be terminated prior to closing, by the mutual consent of the parties;Shell by Vertex Splitter if Vertex-Tensile has failed to consummate the agreement, or breached a covenant, representation or warranty set forthRefining in the agreement, that prevents such closing, and such breach is not cured, if capable of being cured, within 30 days after notice thereof; by Vertex-Tensile if Vertex Splitter has failed to consummate the agreement, or breached a covenant, representation or warranty set forth in the agreement, that prevents such closing, and such breach is not cured, if capable of being cured, within 30 days after notice thereof; or by either party if there is a final, non-appealable judgment preventing the closing.
Pursuant to the Myrtle Grove Purchase Agreement,connection with the purchase price payableof certain crude oil inventory and finished products owned by Vertex Splitter to Vertex-Tensile, for 100% of Tensile-MG was approximately $7.2 million. The Myrtle Grove Purchase closedShell and located at the Mobile Refinery on April 1, 2022 (approximately $124 million of which was funded by Macquarie (defined below) as a result of the simultaneous sale of such inventory to Macquarie pursuant to an Inventory Sales Agreement between Vertex Refining and Macquarie). The Company also paid $8.7 million at closing pursuant to the parties waived the requirement that the closing occur prior to March 31, 2022.
Tensile-Vertex, Vertex Splitter and the Company (collectively, Vertex Splitter and the Company, the “Vertex Parties”) alsoterms of a Swapkit Purchase Agreement entered into a Side Letter Re Purchase and Sale Agreementswith Shell on May 26, 2021 (the “Side LetterSwapkit Agreement”), pursuant to which the Company agreed to fund a technology solution comprising the ecosystem required for the Company to run the Mobile Refinery after closing (the “Swapkit”).
The purchase price allocation is preliminary and subject to change based upon the finalization of our valuation report. The following table summarizes the preliminary determination and recognition of assets acquired (in thousands):
| | | | | | | | | | | | | | | | | |
| Financing agreement | | Vertex acquisition | | Total |
Inventory | $ | 124,311 | | | $ | 5,909 | | | $ | 130,220 | |
Prepaid assets | — | | | 147 | | | 147 | |
Fixed assets | — | | | 97,158 | | | 97,158 | |
Total purchase price | $ | 124,311 | | | $ | 103,214 | | | $ | 227,525 | |
The following table presents summarized results of operations of Mobile Refinery for the period from April 1, 2022 to June 30, 2022, and are included in the accompanying consolidated statement of operations for the period ended June 30, 2022 (in thousands):
| | | | | |
| For Three Months Ended June 30, 2022 |
Revenue | $ | 922,196 | |
Net loss | $ | (24,271) | |
The following table presents unaudited pro forma results of operations reflecting the acquisition of Mobile Refinery as if the acquisition had occurred as of January 1, 2021.This information has been compiled from current and historical financial statements and is not necessarily indicative of the results that actually would have been achieved had the transaction occurred at the beginning of the periods presented or that may be achieved in the future (in thousands):
| | | | | | | | | | | |
| For Six Months Ended June 30, |
| 2022 | | 2021 |
Revenue | $ | 1,670,800 | | | $ | 942,900 | |
Net income (loss) | $ | 30,200 | | | $ | (24,900) | |
NOTE 15. INVENTORY FINANCING AGREEMENT
On April 1, 2022, pursuant to an Inventory Sales Agreement entered into between Vertex Refining and Macquarie, Macquarie purchased all the Mobile Refinery Inventory from Vertex Refining for $130 million (which funds, together with cash on hand, were used by Vertex Refining to purchase the Mobile Refinery Inventory from Shell), which Mobile Refinery Inventory then became subject to the terms of the Supply and Offtake Agreement, discussed in detail below. The following table summarizes our outstanding obligations under our inventory financing agreements as of June 30, 2022 (in thousands):
| | | | | | | | |
| | June 30, 2022 |
Obligations under inventory financing agreement | | $ | 174,607 | |
Unamortized financing cost | | (1,750) | |
Obligations under inventory financing agreement, net | | $ | 172,857 | |
Supply and Offtake Agreement
On April 1, 2022 (the “Commencement Date”), Vertex Refining entered into a Supply and Offtake Agreement (the “Supply and Offtake Agreement”) with Macquarie Energy North America Trading Inc., a Delaware corporation (“Macquarie”), pertaining to crude oil supply and offtake of finished products located at the Mobile Refinery acquired on April 1, 2022. On the Commencement Date, pursuant to an Inventory Sales Agreement and in connection with the Supply and Offtake Agreement, Macquarie purchased from Vertex Refining all crude oil and finished products within the categories covered by the Supply and Offtake Agreement and the Inventory Sales Agreement, which were held at the Mobile Refinery and a certain specified third party storage terminal, which were previously purchased by Vertex Refining as part of the acquisition of the Mobile Refinery as discussed in greater detail above.
Pursuant to the Supply and Offtake Agreement, beginning on the Commencement Date and subject to certain exceptions, substantially all of the crude oil located at the Mobile Refinery and at a specified third party storage terminal from time to time will be owned by Macquarie prior to its sale to Vertex Refining for consumption within the Mobile Refinery processing units. Also pursuant to the Supply and Offtake Agreement, and subject to the terms and conditions and certain exceptions set forth therein, Macquarie will purchase from Vertex Refining substantially all of the Mobile Refinery’s output of certain refined products and will own such refined products while they are located within certain specified locations at the Mobile Refinery. Macquarie takes title to the refined products stored in our storage tanks until they are sold to our retail locations or to third parties. We record the inventory owned by Macquarie on our behalf as inventory with a corresponding accrued liability on our balance sheet because we maintain the risk of loss until the refined products are sold to third parties and we have an obligation to repurchase it.
Pursuant to the Supply and Offtake Agreement and subject to the terms and conditions therein, Macquarie may during the term of the Supply and Offtake Agreement procure crude oil and refined products from certain third parties which may be sold to Vertex Refining or third parties pursuant to the Supply and Offtake Agreement and may sell Refined Products to Vertex Refining or third parties (including customers of Vertex Refining).
The obligations of Vertex Refining and any of its subsidiaries under the Supply and Offtake Agreement and related transaction documents are guaranteed by the Company. The obligations of Vertex Refining and any of its subsidiaries under the Supply and Offtake Agreement and related transaction documents are also secured by a Pledge and Security Agreement in favor of Macquarie, discussed below, executed by Vertex Refining. In addition, the Supply and Offtake Agreement also requires that Vertex Refining post and maintain cash collateral (in the form of an independent amount) as security for Vertex Refining’s obligations under the Supply and Offtake Agreement and the related transaction documents. The amount of cash collateral is subject to adjustments during the term.
Pursuant to the Supply and Offtake Agreement, Vertex Refining and Macquarie agreed thatto cooperate to develop and document, by no later than 180 days after the Commencement Date (September 28, 2022), procedures relating to the unwinding and termination of the agreement and related agreements, in the event of the expiration or early termination of the Supply and Offtake Agreement. The parties also agreed to use commercially reasonable efforts to negotiate mutually agreeable terms for Macquarie’s intermediating of renewable feedstocks and renewable diesel that (i)will be utilized and/or produced by Vertex Refining in connection with and following a planned renewable diesel conversion project at the closingMobile Refinery (including providing Macquarie a right of first refusal in connection therewith), for 90 days after the Commencement Date (the “RD Period”), which discussions are ongoing. If, by the end of the RD Period, Macquarie and Vertex Refining, each acting in good faith and in a commercially reasonable manner, have not been able to reach commercial agreement regarding the entry into a renewable diesel intermediation, Vertex Refining may elect to terminate the Supply and Offtake Agreement by providing notice of any such election to Macquarie; provided that no such election may be effective earlier than the date falling 90 calendar days following the date on which such notice is delivered. The agreement is also subject to termination upon the occurrence of certain events, including the termination of certain agreements relating to the delivery of crude oil to and the offtake of products from the Mobile Refinery. Upon an early termination of the Supply and Offtake Agreement, Vertex Refining is required to pay amounts relating to such termination to Macquarie including, among other things, outstanding unpaid amounts, amounts owing with respect to terminating transactions under the Supply and Offtake Agreement and related transaction documents, unpaid ancillary costs, and breakage costs, losses and out-of-pocket costs with respect to the termination, liquidation, maintenance or
reestablishment, or redeployment of certain hedges put in place by Macquarie in connection with the transactions contemplated by the Myrtle Grove Purchaseagreement, and Vertex Refining is required to pay other termination fees and amounts to Macquarie in the event of any termination of the agreement. Additionally, upon the termination of the Supply and Offtake Agreement, doesthe outstanding obligations of Vertex Refining and Macquarie to each other will be calculated and reduced to an estimated net settlement payment which will be subject to true-up when the final settlement payment has been calculated following termination.
The Supply and Offtake Agreement requires Vertex Refining to prepare and deliver certain forecasts, projections and estimates and comply with financial statement delivery obligations and other disclosure obligations. The agreement also requires Vertex Refining to provide Macquarie notice of certain estimated monthly crude oil delivery, crude oil consumption, product production, target inventory levels and product offtake terms, which Macquarie has the right to reject, subject to certain disclosure requirements.
The Supply and Offtake Agreement has a 24 month term following the Commencement Date, subject to the performance of customary covenants, and certain events of default and termination events provided therein (certain of which are discussed in greater detail below), for a facility of this size and type. Additionally, either party may terminate the agreement at any time, for any reason, with no less than 180 days prior notice to the other.
The Supply and Offtake Agreement includes certain customary representations, warranties, indemnification obligations and limitations of liability of the parties for a facility of this size and type, and also requires Vertex Refining to be responsible for certain ancillary costs relating to the Supply and Offtake Agreement and the transactions contemplated thereby. The Supply and Offtake Agreement requires Vertex Refining to comply with various indemnity, insurance and tax obligations, and also includes a prohibition on any amendments to Vertex Refining’s financing agreements which, among other things, adversely affect Macquarie’s rights and remedies under the Supply and Offtake Agreement and related transaction documents without the prior consent of Macquarie; a prohibition on Vertex Refining entering into any financing agreement which would cause Vertex Refining’s specified indebtedness to exceed $10 million without Macquarie’s prior consent, subject to certain exceptions; and a requirement that Vertex Refining not occur onhave less than $17.5 million in unrestricted cash for any period of more than three consecutive business days. The Supply and Offtake Agreement includes events of default and termination events, including if the Company ceases to beneficially own, directly or indirectly, 100% of the capital stock of Vertex Refining; the change in ownership of the Company or Vertex Refining resulting in one person or group acquiring 50% or more of the capital stock of the Company or Vertex Refining (as applicable); or a change in a majority of the Board of Directors of the Company or Vertex Refining during any 12 consecutive months, without certain approvals, including the approval of the Board of Directors of the Company or Vertex Refining (as applicable) immediately prior to March 31, 2022 (provided thatsuch change; and a cross default to indebtedness (other than indebtedness under financing agreements) of the parties waived such requirementCompany or Vertex Refining for over $20 million, a cross default to indebtedness under financing agreements of Vertex Refining or the Company, or a final judgment or order being rendered against Vertex Refining or the Company in an amount exceeding $20 million.
The price for crude oil purchased by the Company from Macquarie and for products sold by the Company to Macquarie within each agreed product group, in each case, is equal to a pre-determined benchmark, plus a pre-agreed upon differential, subject to adjustments and monthly true-ups.
Vertex Refining will be required to pay Macquarie various monthly fees in connection with the April 1, 2022 closingSupply and Offtake Agreement and related arrangements, including, without limitation, (1) an inventory management fee, calculated based on the value of the inventory owned by Macquarie in connection with the Supply and Offtake Agreement, (2) a lien inventory fee based upon the value of certain inventory on which Macquarie has a lien, (3) a per barrel crude handling fee based upon the volume of crude oil Macquarie sells to Vertex Refining, (4) per barrel crude oil and products intermediation fees for each barrel of crude oil which Macquarie buys from a third party and each barrel of products Macquarie sells to a third party, in each case, in connection with the Supply and Offtake Agreement, and (5) a services fee in respect of which Macquarie agrees to make Crude Oil and Products available to the Company in accordance with the weekly nomination procedure as set forth in the Supply and Offtake Agreement. Vertex Refining will also be responsible for certain payments relating to Macquarie’s hedging of the inventory it owns in connection with the Supply and Offtake Agreement, including the costs of rolling hedges forward each month, as well as any costs (or gains) resulting from a mismatch between the Company’s projected target inventory levels (which provide the basis for Macquarie’s hedge position) and actual month end inventory levels.
In connection with the entry into the Supply and Offtake Agreement, Vertex Refining entered into various ancillary agreements which relate to supply, storage, marketing and sales of crude oil and refined products including, but not limited to the following: Inventory Sales Agreement, Master Crude Oil and Products Agreement, Storage and Services Agreement, and a Pledge and Security Agreement (collectively with the Supply and Offtake Agreement, the “Supply Transaction Documents”). The Company agreed to guarantee the obligations of Vertex Refining and any of its subsidiaries arising under the Supply Transaction Documents pursuant to the entry into a Guaranty in favor of Macquarie.
Myrtle Grove Purchase Agreement), and/or (ii) the closing of the transactions contemplated by the Heartland Purchase Agreement does not occur on or prior to June 30, 2022, then, in addition to any of the rights of Tensile-Vertex under the Purchase Agreements: (a) the Vertex Parties will use their best efforts to cause the closings under the Purchase Agreements to occur, including without limitation by raising debt financing, selling equity in a private or public transaction, selling assets and/or otherwise doing all things necessary or appropriate to raise the funds necessary to make the payments required to be made by Vertex Splitter under the Purchase Agreements, in each case on commercially reasonable terms and conditions, subject to certain exceptions; (b) upon the written election of Tensile-Vertex, the Vertex Parties will and will cause their affiliates to consent to the distribution or other payment of any and all cash and cash equivalents of Heartland SPV (including any proceeds from the repayment of that certain $7,000,000 promissory note, issued by Vertex Operating to Heartland SPV on July 1, 2021, as amended to date (the “Heartland Note”)) and any direct and indirect subsidiaries to Tensile-Vertex, with such distribution or other payment to be structured as specified by Tensile-Vertex so as to be tax efficient for Tensile-Vertex; and (c) Tensile-Vertex may, with written notice, cause Heartland SPV to initiate a process intended to result in a sale of Heartland SPV, with Tensile-Vertex being entitled, upon the consummation of such sale, of the greater of (i) 65% of the total net equity proceeds of such sale, and (ii) the amount due to Tensile-Vertex under the Heartland Purchase Agreement as of the date of the consummation of such sale.
Tensile Transactions
On July 1, 2021, Heartland SPV loaned Vertex Operating $7,000,000, which was evidenced by a Promissory Note (the “Heartland Note”). The Heartland Note accrues interest at the applicable federal rate of interest from time to time, increasing to 12% upon an event of default. Amounts borrowed under the Heartland Note were originally due ninety days after the date of the note, or within five (5) days of the closing of the Sale Agreement relating to our UMO Business (whichever was earlier), and may be prepaid at any time without penalty. In the event the Heartland Note is not paid on or before the applicable due date, we agreed to use our best efforts to raise the funds necessary to repay the note as soon as possible.Tripartite Agreements
Also on February 25, 2022,the Commencement Date, Vertex Operating,Refining, Macquarie and certain parties subject to crude oil supply and products offtake agreements with Vertex Refining, relating to the CompanyMobile Refinery, entered into various tripartite agreements (the “Tripartite Agreements”), whereby Vertex Refining granted Macquarie the right, on a rolling daily or monthly basis, as applicable, to elect to assume Vertex Refining’s rights and Heartland SPV,obligations under such crude oil supply and products offtake agreements in connection with the performance of the Supply and Offtake Agreement, and the counterparties thereto are deemed to have consented to Macquarie’s assuming such obligations. Such Tripartite Agreements also provided for certain interpretations of the provisions of such supply and offtake agreements between Vertex Refining and such third parties in connection with Macquarie’s right to elect to assume Vertex Refining’s rights and obligations under such agreements. The Tripartite Agreements remain in place until the termination of the agreements to which they relate, or the earlier termination thereof as set forth in the Tripartite Agreements, including in the event of certain events of default by the parties thereto under the modified crude oil supply and products offtake agreements or the Supply and Offtake Agreement and related transaction documents and also in the event of the termination of the Supply and Offtake Agreement. Macquarie, Vertex Refining and a third party offtaker also entered into a Second Amendmenttripartite agreement pursuant to Promissory Note (the “Second Note Amendment”), which amendedcertain storage capacity within the Heartland NoteMobile Refinery which Macquarie had leased pursuant to extend the due dateStorage and Services Agreement was effectively made available to such third party consistent with the terms agreed by such party and Vertex Refining in its underlying products offtake agreement. Macquarie, Vertex Refining and a third party storage terminal operator also entered into a tripartite agreement relating to the storage of Macquarie-owned crude oil in such terminal in connection with the Heartland Note until the earlier of (i) June 30, 2022;Supply and (ii) five calendar days following the closing of a sale of substantially all the assets of Vertex OH, and/or the sale of membership interests in Vertex OH possessing voting control (with the consent of the Company), provided that the Heartland Note may be prepaid in whole or in part at any time without premium or penalty and without the consent of Heartland SPV. The Heartland Note accrues interest at the applicable federal rate of interest from time to time, increasing to 12% upon an event of default.Offtake Agreement.
Guaranty
Vertex Refining’s obligations under the Supply and Offtake Agreement and related transaction documents (other than the hedges which are secured and guaranteed on a pari passu basis under the Loan and Security Agreement) were unconditionally guaranteed by the Company pursuant to the terms of a Guaranty entered into on April 1, 2022, by the Company in favor of Macquarie (the “Guaranty”).
NOTE 15.16. DISCONTINUED OPERATIONS
During the third quarter of 2021, the Company initiated and began executing a strategic plan to sell its UMO Business. An investment banking advisory services firm was engaged and actively marketed this segment. On September 28, 2021, the shareholders approved the proposed sale of its portfolio of used motor oil collection and recycling assets to Safety-Kleen.
The Company met all of the criteria to classify the UMO Business’s assets and liabilities as held for sale in the third quarter 2021. The Company has classified the assets, liabilities, and results of operations for this business as “Discontinued Operations” for all periods presented.
Disposal of the UMO Business represented a strategic shift that will have a major effect on the Company’s operations and financial results.
On June 29, 2021, the Company announced that it had entered into a definitive agreement to sell its portfolio of used motor oil collection and recycling assets (the UMO business) to Safety-Kleen, a subsidiary of Clean Harbors, Inc. (“Clean Harbors”) for total cash consideration of $140 million, subject to working capital and other adjustments, and subject to certain closing conditions, including regulatory approvals and a shareholder vote. After retiring term debt, together with the payment of transaction-related fees and financial obligations, total net cash proceeds from the transaction to Vertex were expected to be approximately $90 million.
The Board of Directors considered a number of factors before deciding to enter into the Sale Agreement, including, among other factors, the price to be paid by Safety-Kleen for the UMO Business, the scope of the sale process with respect to the UMO Business that led to entering into the Sale Agreement, the future business prospects of the UMO Business, including the costs to remain competitive and grow, the opinion of H.C. Wainwright & Co., LLC that the terms were fair, from a financial point of
view, the then planned acquisition of the Mobile Refinery, and the planned change in business focus associated therewith, and the terms and conditions of the Sale Agreement.
The Company met all of the criteria to classify the UMO Business’s assets and liabilities as held for sale in the third quarter 2021. The Company has classified the assets, liabilities, and results of operations for this business as “Discontinued Operations” for all periods presented.
On January 25, 2022, the Company entered into a mutual agreement with Safety-Kleen to terminate the Sale Agreement. In connection with the termination agreement, the Company paid Safety-Kleen a break-up fee of $3 million.
Vertex is continuing to explore opportunities for the sale of the UMO business.
The following summarized financial information has been segregated from continuing operations and reported as Discontinued Operations for the three months ended March 31,June 30, 2022, and 2021.2021 (in thousands):
| | | Three Months Ended March 31, | | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2022 | | 2021 | | | 2022 | | 2021 | | 2022 | | 2021 |
Revenues | Revenues | $ | 53,030,228 | | | $ | 33,148,051 | | | Revenues | $ | 59,429 | | | $ | 35,068 | | | $ | 112,459 | | | $ | 68,216 | |
Cost of revenues (exclusive of depreciation shown separately below) | Cost of revenues (exclusive of depreciation shown separately below) | 32,391,095 | | | 20,646,872 | | | Cost of revenues (exclusive of depreciation shown separately below) | 33,585 | | | 24,965 | | | 65,977 | | | 45,611 | |
Depreciation and amortization attributable to costs of revenues | Depreciation and amortization attributable to costs of revenues | 1,304,034 | | | 1,235,323 | | | Depreciation and amortization attributable to costs of revenues | 1,332 | | | 1,278 | | | 2,636 | | | 2,513 | |
Gross profit | Gross profit | 19,335,099 | | | 11,265,856 | | | Gross profit | 24,512 | | | 8,825 | | | 43,846 | | | 20,092 | |
Operating expenses: | Operating expenses: | | | Operating expenses: | |
Selling, general and administrative expenses (exclusive of acquisition related expenses) | Selling, general and administrative expenses (exclusive of acquisition related expenses) | 5,084,332 | | | 5,068,518 | | | Selling, general and administrative expenses (exclusive of acquisition related expenses) | 6,243 | | | 4,648 | | | 11,327 | | | 9,716 | |
Depreciation and amortization expense attributable to operating expenses | Depreciation and amortization expense attributable to operating expenses | 445,263 | | | 455,953 | | | Depreciation and amortization expense attributable to operating expenses | 427 | | | 456 | | | 872 | | | 912 | |
Total operating expenses | Total operating expenses | 5,529,595 | | | 5,524,471 | | | Total operating expenses | 6,670 | | | 5,104 | | | 12,199 | | | 10,628 | |
Income from operations | Income from operations | 13,805,504 | | | 5,741,385 | | | Income from operations | 17,842 | | | 3,721 | | | 31,647 | | | 9,464 | |
Other income (expense) | Other income (expense) | | | Other income (expense) | |
| Interest expense | Interest expense | (5,862) | | | (124,191) | | | Interest expense | 2 | | | (120) | | | (4) | | | (245) | |
Total other expense | Total other expense | (5,862) | | | (124,191) | | | Total other expense | 2 | | | (120) | | | (4) | | | (245) | |
Income before income tax | Income before income tax | 13,799,642 | | | 5,617,194 | | | Income before income tax | 17,844 | | | 3,601 | | | 31,643 | | | 9,219 | |
Income tax benefit (expense) | Income tax benefit (expense) | — | | | — | | | Income tax benefit (expense) | — | | | — | | | — | | | — | |
Income from discontinued operations, net of tax | Income from discontinued operations, net of tax | $ | 13,799,642 | | | $ | 5,617,194 | | | Income from discontinued operations, net of tax | $ | 17,844 | | | $ | 3,601 | | | $ | 31,643 | | | $ | 9,219 | |
The assets and liabilities held for sale on the Consolidated Balance Sheets as of March 31,June 30, 2022 and December 31, 2021 are as follows:follows (in thousands):
| | | March 31, 2022 | | December 31, 2021 | | | June 30, 2022 | | December 31, 2021 | |
ASSETS | ASSETS | | | | | ASSETS | | | | |
Accounts receivable, net | Accounts receivable, net | $ | 15,968,359 | | | $ | 9,583,488 | | | Accounts receivable, net | $ | 15,135 | | | $ | 9,583 | | |
Inventory | Inventory | 7,434,056 | | | 5,547,704 | | | Inventory | 9,014 | | | 5,548 | | |
Prepaid expenses | Prepaid expenses | 582,027 | | | 449,522 | | | Prepaid expenses | 1,953 | | | 450 | | |
Total current assets | Total current assets | 23,984,442 | | | 15,580,714 | | | Total current assets | 26,102 | | | 15,581 | | |
| Fixed assets, at cost | Fixed assets, at cost | 64,051,165 | | | 63,836,354 | | | Fixed assets, at cost | 66,065 | | | 63,837 | | |
Less accumulated depreciation | Less accumulated depreciation | (33,177,074) | | | (32,044,584) | | | Less accumulated depreciation | (34,388) | | | (32,045) | | |
Fixed assets, net | Fixed assets, net | 30,874,091 | | | 31,791,770 | | | Fixed assets, net | 31,677 | | | 31,792 | | |
Finance lease right-of-use assets | Finance lease right-of-use assets | 740,839 | | | 812,974 | | | Finance lease right-of-use assets | — | | | 813 | | |
Operating lease right-of use assets | Operating lease right-of use assets | 27,650,255 | | | 28,260,318 | | | Operating lease right-of use assets | 27,995 | | | 28,260 | | |
Intangible assets, net | Intangible assets, net | 6,661,820 | | | 7,107,083 | | | Intangible assets, net | 6,236 | | | 7,107 | | |
Other assets | Other assets | 563,293 | | | 563,293 | | | Other assets | 484 | | | 563 | | |
Assets held for sale | Assets held for sale | $ | 90,474,740 | | | $ | 84,116,152 | | | Assets held for sale | 92,494 | | | 84,116 | | |
| LIABILITIES AND EQUITY | LIABILITIES AND EQUITY | | | LIABILITIES AND EQUITY | | |
Current liabilities | Current liabilities | | | Current liabilities | | |
Accounts payable | Accounts payable | $ | 11,797,738 | | | $ | 7,764,209 | | | Accounts payable | 6,156 | | | 7,764 | | |
Accrued expenses | Accrued expenses | 2,011,877 | | | 1,323,850 | | | Accrued expenses | 1,355 | | | 1,324 | | |
| Finance lease liability-current | Finance lease liability-current | 236,890 | | | 295,935 | | | Finance lease liability-current | — | | | 296 | | |
Operating lease liability-current | Operating lease liability-current | 27,650,255 | | | 28,260,318 | | | Operating lease liability-current | 27,996 | | | 28,261 | | |
| Liabilities held for sale, current | Liabilities held for sale, current | $ | 41,696,760 | | | $ | 37,644,312 | | | Liabilities held for sale, current | $ | 35,507 | | | $ | 37,645 | | |
|
NOTE 17. FIXED ASSETS, NET
Fixed assets consist of the following (in thousands):
| | | | | | | | | | | | | | | | | |
| Useful Life (in years) | | June 30, 2022 | | December 31, 2021 |
Equipment | 10 | | $ | 75,176 | | | $ | 2,060 | |
Furniture and fixtures | 7 | | 43 | | | 40 | |
Leasehold improvements | 15 | | 338 | | | 113 | |
Office equipment | 5 | | 1,167 | | | 918 | |
Vehicles | 5 | | 575 | | | 373 | |
Building | 20 | | 2,034 | | | — | |
Land improvements | 20 | | 273 | | | 0 |
Construction in progress | | | 30,101 | | | 10,307 | |
Land | | | 7,015 | | | — | |
Total fixed assets | | | 116,722 | | | 13,811 | |
Less accumulated depreciation | | | (4,475) | | | (2,045) | |
Net fixed assets | | | $ | 112,247 | | | $ | 11,766 | |
The increase in fixed assets is due to the fixed assets acquired by the acquisition of the Mobile Refinery on April 1, 2022. Depreciation expense was $2.4 million and $0.1 million for the three months ended June 30, 2022 and 2021, respectively, for the continued operations. Depreciation expense was $2.5 million and $0.2 million for the six months ended June 30, 2022 and 2021, respectively for the continued operations.
Asset Retirement Obligations:
The Company has asset retirement obligations with respect to certain of its refinery assets due to various legal obligations to clean and/or dispose of various component parts of each refinery at the time they are retired. However, these component parts can be used for extended and indeterminate periods of time as long as they are properly maintained and/or upgraded. It is the Company’s practice and current intent to maintain its refinery assets and continue making improvements to those assets based on technological advances. As a result, the Company believes that its refinery assets have indeterminate lives for purposes of estimating asset retirement obligations because dates, or ranges of dates, upon which the Company would retire refinery assets cannot reasonably be estimated. When a date or range of dates can reasonably be estimated for the retirement of any component part of a refinery, the Company estimates the cost of performing the retirement activities and records a liability for the fair value of that cost using established present value techniques.
NOTE 18. INTANGIBLE ASSETS, NET
Components of intangible assets (subject to amortization) consist of the following items:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | June 30, 2022 | | December 31, 2021 |
| | Useful Life (in years) | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Software | | 3 | | $ | 9,344 | | | $ | 969 | | | $ | 8,375 | | | $ | 538 | | | $ | 179 | | | $ | 359 | |
| | | | | | | | | | | | | | |
Intangible assets are amortized on a straight-line basis. We continually evaluate the amortization period and carrying basis of intangible assets to determine whether subsequent events and circumstances warrant a revised estimated useful life or reduction in value.
Total amortization expense of intangibles was $763 thousand and $27 thousand for the three months ended June 30, 2022 and 2021, respectively. Total amortization expense of intangibles was $790 thousand and $54 thousand for the six months ended June 30, 2022 and 2021, respectively.
Estimated future amortization expense is as follows (in thousands):
| | | | | |
Year 1 | $ | 3,051 | |
Year 2 | 3,051 | |
Year 3 | 2,273 | |
| |
| |
Thereafter | — | |
| $ | 8,375 | |
NOTE 19. ACCRUED LIABILITIES
Accrued expenses and other current liabilities consisted of the following (in thousands):
| | | | | | | | | | | | | | |
| | June 30, 2022 | | December 31, 2021 |
Accrued purchases | | $ | 6,440 | | | $ | 553 | |
Accrued interest | | 2,111 | | | 1,594 | |
Accrued compensation and benefits | | 241 | | | 1,082 | |
Accrued income, real estate, sales and other taxes | | 1,328 | | | 389 | |
RINS liabilities | | 20,389 | | | — | |
Environmental liabilities - current | | 51 | | | — | |
| | $ | 30,560 | | | $ | 3,618 | |
The increase in accrued liabilities from December 31, 2021 is due to the operation of the Mobile Refinery, which was acquired on April 1, 2022.
NOTE 16.20. SUBSEQUENT EVENTS
Loan and Security AgreementWarrant Exercises
On April 1,July 11, 2022, (the “Closing Date”), Vertex Refining; the Company, as a guarantor; substantially all2 holders of the Company’s direct and indirect subsidiaries, as guarantors (together with the Company, the “Guarantors”); certain funds and accounts under management by BlackRock Financial Management, Inc. or its affiliates, as lenders (“BlackRock”), certain funds managed or advised by Whitebox Advisors, LLC, as lenders (“Whitebox”), certain funds managed by Highbridge Capital Management, LLC, as lenders (“Highbridge”), Chambers Energy Capital IV, LP, as a lender (“Chambers”), CrowdOut Capital LLC, as a lender (“CrowdOut Capital”), CrowdOut Credit Opportunities Fund LLC, as a lender (collectively with BlackRock, Whitebox, Highbridge, Chambers and CrowdOut Capital, the “Lenders”); and Cantor Fitzgerald Securities, in its capacity as administrative agent and collateral agent for the Lenders (the “Agent”), entered into a Loan and Security Agreement (the “Loan and Security Agreement”).
Pursuant to the Loan and Security Agreement, the Lenders agreed to provide a $125 million term loan to Vertex Refining (the “Term Loan”), the proceeds of which, less agreed upon fees and discounts, were held in escrow prior to the Closing Date, pursuant to an Escrow Agreement, discussed in "Note 3. Concentrations, Significant Customers, Commitments and Contingencies". On the Closing Date, net proceeds from the term loans, less the agreed upon fees and discounts, as well as certain transaction expenses, were released from escrow to Vertex Refining in an aggregate amount of $94,309,958.
The amounts borrowed under the Loan and Security Agreement will bear interest at a rate per annum equal to the sum of (i) the greater of (x) the per annum rate publicly quoted from time to time by The Wall Street Journal as the “Prime Rate” in the United States minus 1.50% as in effect on such day and (y) the Federal Funds rate for such day plus 0.50%, subject in the case of this clause (i), to a floor of 1.0% plus (ii) 9.25%. The funds borrowed in connection with the Term Loan were issued with an original issue discount of 1.5%. The Company also paid certain fees and transaction expenses in connection with the release of the funds in connection with the Term Loan. Amounts owed under the Loan and Security Agreement, if not earlier repaid, are due on April 1, 2025 (or the next business day thereafter). Interest on the Term Loan is payable in cash (i) quarterly, in arrears, on the last business day of each calendar quarter, commencing on the last business day of the calendar quarter ending June 30, 2022, (ii) in connection with any payment, prepayment or repayment of the Term Loan (including as discussed in greater detail
below), and (iii) at maturity (whether upon demand, by acceleration or otherwise). Pursuant to the Loan and Security Agreement, on the last day of March, June, September and December of each year (or if such day is not a business day, the next succeeding business day), beginning on March 31, 2023 and ending on December 31, 2024, Vertex Refining is required to repay $1,562,500 of the principal amount owed under the Loan and Security Agreement (i.e., 1.25% of the original principal amount per quarter), subject to reductions in the event of any prepayment of the Loan and Security Agreement.
In the event of any payment, repayment or prepayment (other than with respect to a sale of the Company’s used motor oil assets or a change of control which are discussed below, and other than in connection with prepayments required to be made with funds received from insurance settlements and recoveries which are not subject to a prepayment premium), including in the event of acceleration of the Term Loan, certain asset sales (other than the used motor oil assets), certain equity issuances, and voluntary prepayments (a) during the first 18 months after the Closing Date, Vertex Refining agreed to pay an additional amount to the Lenders equal to 150% of the applicable interest rate, multiplied by the amount of such prepayment amount; (b) during the 19th through 24th months after the Closing Date, Vertex Refining agreed to pay an additional amount to the Lenders equal to 50% of the applicable interest rate, multiplied by the amount of such prepayment amount; and (c) at any time during the 25th month after the Closing Date, but prior to the date that is 90 days before the maturity date of amounts owed pursuant to the Loan and Security Agreement, Vertex Refining agreed to pay an additional amount to the Lenders equal to 25% of the applicable interest rate, multiplied by the amount of such prepayment amount. Upon the sale of the Company’s used motor oil assets (as discussed below), or the required repayment upon a change of control (also discussed below), Vertex Refining agreed to pay an additional amount to the Lenders equal to 1% of the aggregate principal amount of the amount prepaid (as applicable, the “Prepayment Premium”). The Prepayment Premium is also due upon a change of control, which includes the direct or indirect transfer of all or substantially all of the assets of the Loan Parties (defined below); the adoption of a plan of liquidation or dissolution relating to the Company; the acquisition in one or a series of transactions of 33% or more of the equity interests of the Company by a person or entity; the Company’s failure to own 100% of Vertex Refining and the other Loan Parties, unless permitted by the Lenders; during any period of twelve consecutive months commencing on or after the Closing Date, the occurrence of a change in the composition of the Board of Directors of the Company such that a majority of the members of such Board of Directors are no longer directors; or a “change of control” or any comparable term under, and as defined in, any other indebtedness exceeding $2 million of the Loan Parties, shall have occurred (each a “Change of Control”).
The Company used a portion of the proceeds from the Term Loan borrowing to pay a portion of the purchase price associated with the acquisition of the Mobile Refinery acquired by Vertex Refining on April 1, 2022, as discussed in greater detail below, and to pay certain fees and expenses associated with the closing of the Loan and Security Agreement and is required to use the remainder of the funds for (i) the planned renewable diesel conversion of the Mobile Refinery, and (ii) working capital and liquidity needs.
The amounts borrowed pursuant to the terms of the Loan and Security Agreement are secured by substantially all of the present and after-acquired assets of the Company and its subsidiaries. Additionally, Vertex Refining’s obligations under the Loan and Security Agreement are jointly and severally guaranteed by substantially all of the Company’s subsidiaries and the Company (collectively, Vertex Refining, the Company and the Company’s subsidiaries which have guaranteed Vertex Refining’s obligations under the Loan and Security Agreement, the “Loan Parties”).
The Loan and Security Agreement includes customary representations and warranties, and affirmative and negative covenants of the Loan Parties for a facility of this size and type, including prohibiting the Loan Parties from creating any indebtedness without the consent of the Lenders, subject to certain exceptions, and requiring the Loan Parties to have no less than $17.5 million of unrestricted cash for more than three consecutive business days.
The Loan and Security Agreement includes customary events of default for transactions of this type, including failures to pay amounts due, bankruptcy proceedings, covenant defaults, attachment or seizure of a material portion of the collateral securing the Loan and Security Agreement, cross defaults, if there is a default in any agreement governing indebtedness in excess of $3,000,000, resulting in the right to accelerate such indebtedness, certain judgments against a Loan Party, misrepresentations by the Loan Parties in the transaction documents, insolvency, cross default of the Offtake and Supply Agreement (defined and described below), a Change of Control, termination of certain intercreditor agreements, and the loss or termination of certain material contacts. Upon the occurrence of an event of default the Agent may declare the entire amount of obligations owed under the Loan and Security Agreement immediately due and payable and take certain other actions provided for under the Loan and Security Agreement, including enforcing security interests and guarantees.
The Loan and Security Agreement includes customary indemnification obligations for a facility of this size and type, requiring us to indemnify the Agent and the Lenders for certain expenses, losses and claims.
In connection with the Loan and Security Agreement, and as additional consideration for the Lenders agreeing to loan funds to the Company thereunder, the Company granted warrants to purchase 2,750,000an aggregate of 165,000 shares of our common stock of the Company to the Lenders (and/or their affiliates) on the Closing Date, as discussed in greater detail below.
The amounts owed under the Loan and Security Agreement are also secured by various deeds of trusts and mortgages for the real property(s) described therein, over the Mobile Refinery and substantially all other material owned and leased real property of the Guarantors including properties in Texas and Louisiana.
Intellectual Property Security Agreement
In connection with the entry into the Loan and Security Agreement, Vertex Operating entered into an Intellectual Property Security Agreement in favorexercise price of the Agent, pursuant to which it granted a security interest in substantially all of its intellectual property (including patents and trademarks) in favor of the Lenders to secure the obligations of the Loan Parties under the Loan and Security Agreement.
Collateral Pledge Agreement
In connection with the entry into the Loan and Security Agreement, the Company, Vertex Refining and each of the Guarantors, entered into a Collateral Pledge Agreement in favor of the Agent, pursuant to which they granted the Agent a security interest in all now owned or hereafter acquired promissory notes and instruments evidencing indebtedness to any Guarantor and all now owned or hereafter acquired equity interests owned by such Guarantor.
Intercreditor Agreement
In connection with the entry into the Loan and Security Agreement and the Supply and Offtake Agreement (as defined below), Agent, Macquarie (as defined below), Vertex Refining and each of the Guarantors (collectively, the “Grantors”) entered into an intercreditor agreement (the “Intercreditor Agreement”) pursuant to which the Agent and Macquarie acknowledged each other’s liens on the assets of Vertex Refining. The intercreditor arrangements may limit our ability to amend the Loan and Security Agreement and the Supply and Offtake Agreement and related agreements, provides for certain restrictions on the exercise of remedies (through “standstill” and access periods) and governs certain creditor rights in bankruptcy proceedings relating to Grantors.
Completion of Mobile Refinery Acquisition
On April 1, 2022, Vertex Operating assigned its rights to the Refinery Purchase Agreement to Vertex Refining and on the same date, Vertex Refining completed the Mobile Acquisition. On the Effective Date, a total of $75.0 million (less $10 million previously paid) was paid by Vertex Refining in consideration for the acquisition of the Mobile Refinery, which amount is subject to customary purchase price adjustments and reimbursement for certain capital expenditures in the amount of approximately $440,000, $15.9 million was paid to Shell for previously agreed upon capital expenditures and miscellaneous prepaid and reimbursable items, and $164.2 million was paid to Shell by Vertex Refining in connection with the purchase of certain crude oil inventory and finished products owned by Shell and located at the Mobile Refinery on the Closing Date (approximately $154 million of which was funded by Macquarie as a result of the simultaneous sale of such inventory to Macquarie pursuant to an Inventory Sales Agreement between Vertex Refining and Macquarie). The Company also paid $8.7 million at closing pursuant to the terms of a Swapkit Purchase Agreement entered into with Shell on May 26, 2021 (the “Swapkit Agreement”), pursuant to which the Company agreed to fund a technology solution comprising the ecosystem required for the Company to run the Mobile Refinery after closing (the “Swapkit”). The purchase price allocation is pending and subject to change based upon the finalization of a third party valuation report.
Following the closing of the Mobile Acquisition, the Company (through one or more of its subsidiaries and affiliates) plans to complete an $85 million capital project designed to modify the Mobile Refinery’s hydrocracking unit to produce renewable diesel fuel on a standalone basis.
Funds for the purchase of the Mobile Refinery, Swapkit Agreement, provision of cash collateral required pursuant to terms of the Supply and Offtake Agreement (discussed below), capital expenditures and transaction expenses, came from funds previously held in escrow in connection with our November 2021 sale of $155 million principal at maturity of Convertible Senior Notes ($100.4 million), the Term Loan and cash on hand. Following the transactions described above, including the Term Loan, and our acquisition of Tensile-MG (as defined and discussed below), our unrestricted cash increased by approximately $75 million, which funds are anticipated to be used for (i) the planned renewable diesel conversion of the Mobile Refinery, and (ii) working capital and liquidity needs.
Completion of Myrtle Grove Purchase Agreement
On April 1, 2022, the Company, through Vertex Splitter acquired the 15% noncontrolling interest of MG SPV held by Tensile-MG from Vertex-Tensile for $7.2 million, which was based on the value of the Class B Unit preference of MG SPV held by Tensile-MG, plus capital invested by Tensile-MG in MG SPV (which had not been returned as of the date of payment), plus cash and cash equivalents held by Tensile-MG as of the closing date. As a result, the Company acquired 100% of MG SPV, which in turn owns the Company’s Belle Chasse, Louisiana, re-refining complex.
Inventory and Finished Products Purchase and Sale
As a required condition to the closing of the Mobile Acquisition, on the Closing Date, Vertex Refining paid approximately $164.2 million for the acquisition from Shell, of all Mobile Refinery Inventory (defined below). Also on April 1, 2022, pursuant to an Inventory Sales Agreement entered into between Vertex Refining and Macquarie, Macquarie purchased all the Mobile Refinery Inventory from Vertex Refining for $154 million (which funds, together with cash on hand, were used by Vertex Refining to purchase the Mobile Refinery Inventory from Shell), which Mobile Refinery Inventory then became subject to the terms of the Supply and Offtake Agreement, discussed in detail below.
Supply and Offtake Agreement
On April 1, 2022 (the “Commencement Date”), Vertex Refining entered into a Supply and Offtake Agreement (the “Supply and Offtake Agreement”) with Macquarie Energy North America Trading Inc., a Delaware corporation (“Macquarie”), pertaining to crude oil supply and offtake of finished products located at the Mobile Refinery acquired on April 1, 2022. On the Commencement Date, pursuant to an Inventory Sales Agreement and in connection with the Supply and Offtake Agreement, Macquarie purchased from Vertex Refining all crude oil and finished products within the categories covered by the Supply and Offtake Agreement and the Inventory Sales Agreement, which were held at the Mobile Refinery and a certain specified third party storage terminal, which were previously purchased by Vertex Refining as part of the acquisition of the Mobile Refinery as discussed in greater detail above.
Pursuant to the Supply and Offtake Agreement, beginning on the Commencement Date and subject to certain exceptions, substantially all of the crude oil located at the Mobile Refinery and at a specified third party storage terminal from time to time will be owned by Macquarie prior to its sale to Vertex Refining for consumption within the Mobile Refinery processing units. Also pursuant to the Supply and Offtake Agreement, and subject to the terms and conditions and certain exceptions set forth therein, Macquarie will purchase from Vertex Refining substantially all of the Mobile Refinery’s output of certain refined products and will own such refined products while they are located within certain specified locations at the Mobile Refinery. Macquarie will have title to and risk of loss of crude oil and refined products purchased from Vertex Refining while within certain specified locations at the Mobile Refinery and a specified third party storage terminal.
Pursuant to the Supply and Offtake Agreement and subject to the terms and conditions therein, Macquarie may during the term of the Supply and Offtake Agreement procure crude oil and refined products from certain third parties which may be sold to Vertex Refining or third parties pursuant to the Supply and Offtake Agreement and may sell Refined Products to Vertex Refining or third parties (including customers of Vertex Refining).
The obligations of Vertex Refining and any of its subsidiaries under the Supply and Offtake Agreement and related transaction documents are guaranteed by the Company. The obligations of Vertex Refining and any of its subsidiaries under the Supply and Offtake Agreement and related transaction documents are also secured by a Pledge and Security Agreement in favor of Macquarie, discussed below, executed by Vertex Refining. In addition, the Supply and Offtake Agreement also requires that Vertex Refining post and maintain cash collateral (in the form of an independent amount) as security for Vertex Refining’s obligations under the Supply and Offtake Agreement and the related transaction documents. The amount of cash collateral is subject to adjustments during the term.
Pursuant to the Supply and Offtake Agreement, Vertex Refining and Macquarie agreed to cooperate to develop and document, by no later than 180 days after the Commencement Date, procedures relating to the unwinding and termination of the agreement and related agreements, in the event of the expiration or early termination of the Supply and Offtake Agreement. The parties also agreed to use commercially reasonable efforts to negotiate mutually agreeable terms for Macquarie’s intermediating of renewable feedstocks and renewable diesel that will be utilized and/or produced by Vertex Refining in connection with and following a planned renewable diesel conversion project at the Mobile Refinery (including providing Macquarie a right of first refusal in connection therewith), for 90 days after the Commencement Date (the “RD Period”). If, by the end of the RD Period, Macquarie and Vertex Refining, each acting in good faith and in a commercially reasonable manner, have not been able to
reach commercial agreement regarding the entry into a renewable diesel intermediation, Vertex Refining may elect to terminate the Supply and Offtake Agreement by providing notice of any such election to Macquarie; provided that no such election may be effective earlier than the date falling 90 calendar days following the date on which such notice is delivered. The agreement is also subject to termination upon the occurrence of certain events, including the termination of certain agreements relating to the delivery of crude oil to and the offtake of products from the Mobile Refinery. Upon an early termination of the Supply and Offtake Agreement, Vertex Refining is required to pay amounts relating to such termination to Macquarie including, among other things, outstanding unpaid amounts, amounts owing with respect to terminating transactions under the Supply and Offtake Agreement and related transaction documents, unpaid ancillary costs, and breakage costs, losses and out-of-pocket costs with respect to the termination, liquidation, maintenance or reestablishment, or redeployment of certain hedges put in place by Macquarie in connection with the transactions contemplated by the agreement, and Vertex Refining is required to pay other termination fees and amounts to Macquarie in the event of any termination of the agreement. Additionally, upon the termination of the Supply and Offtake Agreement, the outstanding obligations of Vertex Refining and Macquarie to each other will be calculated and reduced to an estimated net settlement payment which will be subject to true-up when the final settlement payment has been calculated following termination.
The Supply and Offtake Agreement requires Vertex Refining to prepare and deliver certain forecasts, projections and estimates and comply with financial statement delivery obligations and other disclosure obligations. The agreement also requires Vertex Refining to provide Macquarie notice of certain estimated monthly crude oil delivery, crude oil consumption, product production, target inventory levels and product offtake terms, which Macquarie has the right to reject, subject to certain disclosure requirements.
The Supply and Offtake Agreement has a 24 month term following the Commencement Date, subject to the performance of customary covenants, and certain events of default and termination events provided therein (certain of which are discussed in greater detail below), for a facility of this size and type. Additionally, either party may terminate the agreement at any time, for any reason, with no less than 180 days prior notice to the other.
The Supply and Offtake Agreement includes certain customary representations, warranties, indemnification obligations and limitations of liability of the parties for a facility of this size and type, and also requires Vertex Refining to be responsible for certain ancillary costs relating to the Supply and Offtake Agreement and the transactions contemplated thereby. The Supply and Offtake Agreement requires Vertex Refining to comply with various indemnity, insurance and tax obligations, and also includes a prohibition on any amendments to Vertex Refining’s financing agreements which, among other things, adversely affect Macquarie’s rights and remedies under the Supply and Offtake Agreement and related transaction documents without the prior consent of Macquarie; a prohibition on Vertex Refining entering into any financing agreement which would cause Vertex Refining’s specified indebtedness to exceed $10 million without Macquarie’s prior consent, subject to certain exceptions; and a requirement that Vertex Refining not have less than $17.5 million in unrestricted cash for any period of more than three consecutive business days. The Supply and Offtake Agreement includes events of default and termination events, including if the Company ceases to beneficially own, directly or indirectly, 100% of the capital stock of Vertex Refining; the change in ownership of the Company or Vertex Refining resulting in one person or group acquiring 50% or more of the capital stock of the Company or Vertex Refining (as applicable); or a change in a majority of the Board of Directors of the Company or Vertex Refining during any 12 consecutive months, without certain approvals, including the approval of the Board of Directors of the Company or Vertex Refining (as applicable) immediately prior to such change; and a cross default to indebtedness (other than indebtedness under financing agreements) of the Company or Vertex Refining for over $20 million, a cross default to indebtedness under financing agreements of Vertex Refining or the Company, or a final judgment or order being rendered against Vertex Refining or the Company in an amount exceeding $20 million.
The price for crude oil purchased by the Company from Macquarie and for products sold by the Company to Macquarie within each agreed product group, in each case, is equal to a pre-determined benchmark, plus a pre-agreed upon differential, subject to adjustments and monthly true-ups.
Vertex Refining will be required to pay Macquarie various monthly fees in connection with the Supply and Offtake Agreement and related arrangements, including, without limitation, (1) an inventory management fee, calculated based on the value of the inventory owned by Macquarie in connection with the Supply and Offtake Agreement, (2) a lien inventory fee based upon the value of certain inventory on which Macquarie has a lien, (3) a per barrel crude handling fee based upon the volume of crude oil Macquarie sells to Vertex Refining, (4) per barrel crude oil and products intermediation fees for each barrel of crude oil which Macquarie buys from a third party and each barrel of products Macquarie sells to a third party, in each case, in connection with the Supply and Offtake Agreement, and (5) a services fee in respect of which Macquarie agrees to make Crude Oil and Products available to the Company in accordance with the weekly nomination procedure as set forth in the Supply and Offtake Agreement. Vertex Refining will also be responsible for certain payments relating to Macquarie’s hedging of the inventory it owns in connection with the Supply and Offtake Agreement, including the costs of rolling hedges forward each month, as well
as any costs (or gains) resulting from a mismatch between the Company’s projected target inventory levels (which provide the basis for Macquarie’s hedge position) and actual month end inventory levels.
In connection with the entry into the Supply and Offtake Agreement, Vertex Refining entered into various ancillary agreements which relate to supply, storage, marketing and sales of crude oil and refined products including, but not limited to the following: Inventory Sales Agreement, Master Crude Oil and Products Agreement, Storage and Services Agreement, and a Pledge and Security Agreement (collectively with the Supply and Offtake Agreement, the “Supply Transaction Documents”). The Company agreed to guarantee the obligations of Vertex Refining and any of its subsidiaries arising under the Supply Transaction Documents pursuant to the entry into a Guaranty in favor of Macquarie.
Tripartite Agreements
Also on the Commencement Date, Vertex Refining, Macquarie and certain parties subject to crude oil supply and products offtake agreements with Vertex Refining, relating to the Mobile Refinery, entered into various tripartite agreements (the “Tripartite Agreements”), whereby Vertex Refining granted Macquarie the right, on a rolling daily or monthly basis, as applicable, to elect to assume Vertex Refining’s rights and obligations under such crude oil supply and products offtake agreements in connection with the performance of the Supply and Offtake Agreement, and the counterparties thereto are deemed to have consented to Macquarie’s assuming such obligations. Such Tripartite Agreements also provided for certain interpretations of the provisions of such supply and offtake agreements between Vertex Refining and such third parties in connection with Macquarie’s right to elect to assume Vertex Refining’s rights and obligations under such agreements. The Tripartite Agreements remain in place until the termination of the agreements to which they relate, or the earlier termination thereof as set forth in the Tripartite Agreements, including in the event of certain events of default by the parties thereto under the modified crude oil supply and products offtake agreements or the Supply and Offtake Agreement and related transaction documents and also in the event of the termination of the Supply and Offtake Agreement. Macquarie, Vertex Refining and a third party offtaker also entered into a tripartite agreement pursuant to which certain storage capacity within the Mobile Refinery which Macquarie had leased pursuant to the Storage and Services Agreement was effectively made available to such third party consistent with the terms agreed by such party and Vertex Refining in its underlying products offtake agreement. Macquarie, Vertex Refining and a third party storage terminal operator also entered into a tripartite agreement relating to the storage of Macquarie-owned crude oil in such terminal in connection with the Supply and Offtake Agreement.
Guaranty
Vertex Refining’s obligations under the Supply and Offtake Agreement and related transaction documents (other than the hedges which are secured and guaranteed on a pari passu basis under the Loan and Security Agreement) were unconditionally guaranteed by the Company pursuant to the terms of a Guaranty entered into on April 1, 2022, by the Company in favor of Macquarie (the “Guaranty”).
Pledge and Security Agreement
In connection with the entry into the Supply and Offtake Agreement, Vertex Refining entered into a Pledge and Security Agreement in favor of Macquarie, pursuant to which it provided Macquarie a first priority security interest in all inventory, including all crude oil, product, and all proceeds with respect of the forgoing, subject to certain exceptions. The Pledge and Security Agreement includes customary representations, warranties and covenants of Vertex Refining for a facility of this size and type.
Inventory Sales Agreement
On April 1, 2022, pursuant to an Inventory Sales Agreement entered into between Vertex Refining and Macquarie, Macquarie purchased all crude oil and finished products (including, jet fuel, diesel and gasoline) located at the Mobile Refinery and held in inventory on such date, which purchase was based on agreed upon market values (the “Mobile Refinery Inventory”) from Vertex Refining for $154 million (which funds, together with cash on hand, were used by Vertex Refining to purchase the Mobile Refinery Inventory from Shell, as discussed in detail above), which Mobile Refinery Inventory then became subject to the terms of the Supply and Offtake Agreement.
Crude Supply Agreement
On the Commencement Date, Vertex Refining and Shell Trading (US) Company (“STUSCO”) entered into a Crude Oil & Hydrocarbon Feedstock Supply Agreement (the “Crude Supply Agreement”) pursuant to which STUSCO agreed to sell to Vertex Refining, and Vertex Refining agreed to buy from STUSCO, all of the crude oil and hydrocarbon feedstock
requirements of the Mobile Refinery, subject to certain exceptions set forth therein. The agreement provides that STUSCO is the exclusive supplier for the Mobile Refinery’s requirement for crude oil and hydrocarbon feedstock.
The initial term of the Crude Supply Agreement will continue for five (5) years beginning on the Commencement Date, unless earlier terminated, and will automatically renew for one (1) year renewal terms thereafter subject to timely notice of either party that it elects not to so renew.
Pursuant to the Crude Supply Agreement, STUSCO will procure crude oil based upon a monthly mandate from Vertex Refining as to the Mobile Refinery’s requirements for each delivery month, based on a pre-agreed price, based on internal market prices, subject in certain cases to markup.
Vertex Refining will prepay STUSCO for crude oil deliveries on a provisional basis during a predetermined delivery period during each delivery month, subject to final true up.
The Crude Supply Agreement also contains customary and typical general terms and conditions for transactions of this nature.
Pursuant to a tripartite agreement, Macquarie may intermediate Vertex Refining’s purchases of crude oil from STUSCO under the Crude Supply Agreement, from time to time, by assuming Vertex Refining’s rights and obligations under the Crude Supply Agreement in respect of purchases of crude oil and feedstock in a given delivery month. If Macquarie assumes Vertex Refining’s rights and obligations, Macquarie will be responsible for paying the purchase price for such crude oil and feedstocks to STUSCO in accordance with the terms of the tripartite agreement. In the event that Macquarie intermediates a purchase and sale, the terms and conditions for Vertex Refining’s payments to Macquarie for such crude oil and feedstocks will be determined pursuant to the Supply and Offtake Agreement.
Storage & Services Agreement
On the Commencement Date, Vertex Refining and Macquarie entered into a Storage & Services Agreement (the “Storage & Services Agreement”), whereby Vertex Refining granted Macquarie certain access, storage, usage and information rights in respect of the Mobile Refinery and certain storage facilities and agreed to provide Macquarie certain services in connection with, among other things, such rights under certain other agreements, including the Supply and Offtake Agreement and various tripartite agreements.
Pursuant to the Storage & Services Agreement, Macquarie will pay Vertex Refining a monthly storage fee for provision of the storage and related services.
Pursuant to the Storage & Services Agreement, Macquarie will have the exclusive and uninterrupted license and right to use certain storage facilities specified in the Supply and Offtake Agreement (the “Included Locations”), including the right to inject, store and withdraw crude oil and products (as applicable) in and from the Included Locations. Vertex Refining will be responsible for the care, custody and control of, and will hold as bailee, the property of Macquarie and certain other eligible hydrocarbons which are held within the Included Locations, and will be solely responsible for pumping, unloading, receipt, movements, blending, transportation, storage, measuring, gauging, sampling, analysis, treatment, refining, loading, and delivery of and use of such property, subject to the terms of the Supply and Offtake Agreement and other applicable transaction documents.
Pursuant to the Storage & Services Agreement and in addition to customary services provided by a storage provider, Macquarie has appointed Vertex Refining to perform certain obligations assumed by Macquarie in connection with supply, offtake and exchange arrangements related to the Supply and Offtake Agreement and related transaction documents, including, without limitation, giving, receiving, accepting and rejecting nominations for delivering, loading, unloading, receiving and transporting crude oil and products; the provision of facilities for the delivery, loading, unloading and transportation of crude oil and products; arranging, coordinating quantity and quality sampling, measurements, analysis and inspections for crude oil and products; preparing and handling shipping documentation; providing information with respect to, and submitting claims in relation to, quality, quantity and demurrage; and notifying Macquarie of the occurrence of certain specified events. Vertex Refining periodically will be required to provide various reports to Macquarie regarding the inventory held in the Included Locations.
The Storage & Services Agreement includes certain accelerated export rights pursuant to which, upon the occurrence of certain events, including during the continuation of an event of default under the Supply and Offtake Agreement, Macquarie can instruct Vertex Refining to withdraw all or any amount of Macquarie’s property from the Included Locations.
Macquarie has certain rights to inspect and access the Included Locations and conduct audits on accounting records and other documents maintained by Vertex Refining relating to the Storage & Services Agreement, in each case subject to the terms and conditions of the Storage & Services Agreement.
Vertex Refining will be required to maintain and operate the Included Locations in accordance with various customary covenants contained within the Storage & Services Agreement, including, without limitation, in respect of the maintenance of the Included Locations and related facilities, the standard of care pursuant to which Vertex Refining will perform services under the Storage & Services Agreement, insurance requirements, and compliance with laws. Vertex Refining made various representations and warranties to Macquarie which are required to continue to be met during the term of the agreement, which are customary and typical for storage agreements relating to an intermediation facility, including maintaining insurance. The Supply & Storage Agreement also includes certain customary limitations on liability and damages.
In addition to certain obligations to indemnify Macquarie for loss, damage or degradation of Macquarie’s property held at the Included Locations, Vertex Refining agreed to indemnify Macquarie against various liabilities which may arise relating to its performance under the Storage & Services Agreement, as well as, among other liabilities, any liabilities directly or indirectly arising from or in connection with environmental conditions at the facility, environmental law, required permits, and law applicable to the operation of Vertex Refining’s refinery and storage facilities.
The term of the Storage & Services Agreement will continue until the earlier to occur of (i) the date upon which all of Macquarie’s property in the Included Locations has been sold to Vertex Refining or another person or (ii) the date upon which Macquarie has certified that all of its property has been removed from the Included Locations.
ULSD/Gasoline Offtake Agreement
On the Commencement Date, Vertex Refining and Equilon Enterprises LLC, dba Shell Oil Products US (“Shell”) entered into a refined products offtake agreement for the sale of ultra low sulfur diesel (“ULSD”) and gasoline (the “ULSD/Gasoline Offtake Agreement”) pursuant to which Shell agreed to purchase from Vertex Refining, and Vertex Refining agreed to sell to Shell, ULSD and gasoline produced by the Mobile Refinery according to an agreed nomination and confirmation process, subject to certain exceptions set forth therein.
The initial term of the ULSD/Gasoline Offtake Agreement will continue for five years beginning on the Commencement Date, unless earlier terminated as provided in the ULSD/Gasoline Offtake Agreement, and will automatically renew for one year renewal terms thereafter, unless terminated by either party by written notice as set forth therein.
With respect to purchases and sales of ULSD, during the first three years of the term, Shell is required to purchase and Vertex Refining is required to sell certain pre-determined amounts of barrels (subject to minimums and maximums) per month. Thereafter, Vertex Refining may elect to sell Shell the same amounts or certain other pre-determined amounts, at Shell’s option. Volumes in excess of the foregoing limits for ULSD may be sold subject to mutual agreement.
With respect to purchases and sales of gasoline, during the first three years of the term, Shell will purchase all gasoline produced at the refinery up to a certain maximum number of barrels per day, and all premium gasoline up to a pre-determined maximum number of barrels per day. Thereafter, Vertex Refining may elect to sell Shell the same amounts or certain pre-determined amounts of barrels (subject to minimums and maximums) per month, at Shell’s option. Volumes in excess of the foregoing limits for gasoline may be sold subject to mutual agreement.
In the event that Shell does not purchase and take delivery of certain required quantities of product nominated for purchase in a given month, Vertex Refining is entitled to sell the resulting shortfall volumes and obtain cover damages from Shell (excluding shortfall volumes resulting from force majeure events). In the event that Vertex Refining does not supply certain required quantities of product nominated for sale in a given month, Shell is entitled to procure replacement product to cover the shortfall volumes and obtain damages from Vertex Refining (excluding shortfall volumes resulting from force majeure events) in connection therewith.
Products will be provisionally priced and invoiced over certain pre-determined periods, subject to final true up. Prices will be calculated based upon published indices and an agreed fixed per gallon differentials.
The ULSD/Gasoline Offtake Agreement also contains customary and typical general terms and conditions for transactions of this nature.
Warrant Agreement
In connection with the entry into the Loan and Security Agreement, and as a required term and condition thereof, on April 1, 2022, the Company granted warrants (the “Warrants”) to purchase 2,750,000 shares of the Company’s common stock to the Lenders and their assigns. The terms of the Warrants are set forth in a Warrant Agreement entered into on April 1, 2022, between the Company and Continental Stock Transfer & Trust Company as warrant agent (the “Warrant Agreement”). The Warrants have a five-year term and a $4.50 per share and a holder of warrants to purchase 15,000 shares of our common stock with an exercise price and include weighted average anti-dilutive rights.
Option Exercises
In April, 2022, the Company issued 37,500of $9.25 per share, exercised such warrants in a cashless exercise (surrendering 81,925 shares of common stock in connection with such exercise, valued based on the cashfive day trailing volume weighted average price of the Company’s common stock, to pay the exercise price due in connection therewith), pursuant to the terms of options to purchase 37,500such warrants, and were issued 98,075 shares of common stock.
On July 19, 2022, a holder of warrants to purchase 100 shares of our common stock whichwith an exercise price of $4.50 per share exercised such warrants for cash and was issued 100 shares were covered by a Form S-8 Registration Statement.
of common stock.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Introduction
This information should be read in conjunction with the interim unaudited financial statements and the notes thereto included in this Quarterly Report on Form 10-Q, and the audited financial statements and notes thereto and “Part II”, “Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission on March 14, 2022 (the “Annual Report”). The majority of the numbers presented below are rounded numbers and should be considered as approximate.
Our logo and some of our trademarks and tradenames are used in this Report. This Report also includes trademarks, tradenames and service marks that are the property of others. Solely for convenience, trademarks, tradenames and service marks referred to in this Report may appear without the ®, ™ and SM symbols. References to our trademarks, tradenames and service marks are not intended to indicate in any way that we will not assert to the fullest extent under applicable law our rights or the rights of the applicable licensors if any, nor that respective owners to other intellectual property rights will not assert, to the fullest extent under applicable law, their rights thereto. We do not intend the use or display of other companies’ trademarks and trade names to imply a relationship with, or endorsement or sponsorship of us by, any other companies.
In this Quarterly Report on Form 10-Q, we may rely on and refer to information regarding the refining, re-refining, used oil and oil and gas industries in general from market research reports, analyst reports and other publicly available information. Although we believe that this information is reliable, we cannot guarantee the accuracy and completeness of this information, and we have not independently verified any of it.
Our fiscal year ends on December 31st. Interim results are presented on a quarterly basis for the quarters ended March 31, June 30, and September 30th, the first quarter, second quarter and third quarter, respectively, with the quarter ending December 31st being referenced herein as our fourth quarter. Fiscal 2022 means the year ended December 31, 2022, and fiscal 2021 means the year ended December 31, 2021.
Please see the “Glossary” beginning on page 4 of the Annual Report, for a list of abbreviations and definitions used throughout this Report.
Unless the context requires otherwise, references to the “Company,” “we,” “us,” “our,” “Vertex”, “Vertex Energy” and “Vertex Energy, Inc.” refer specifically to Vertex Energy, Inc. and its consolidated subsidiaries.
In addition, unless the context otherwise requires and for the purposes of this report only:
“BBL” (also “bbl” or “Bbl”) is the abbreviated form for one barrel, 42 U.S. gallons of liquid volume.
“BPD” (also “bpd”) is the abbreviated form for barrels per day. This can refer to designed or actual capacity/throughput.
“BCD” (also “bcd”, “b/cd”) is the abbreviated form of barrels per calendar day; meaning the total number of barrels of actual throughput processed within 24 hours under typical operating conditions.
“Base Oiloil” means the lubricationis a lubricant grade oilsoil initially produced from refining crude oil (mineral base oil) or through chemical synthesis (synthetic base oil). In general, only 1% to 2% of a barrel of crudeused in manufacturing lubricant products such as lubricating greases, motor oil, is suitable for refining into base oil. The majority of the barrel is used to produce gasoline and other hydrocarbons;metal processing fluids.
“CutterstockBlack Oil” means fuelis 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 usedrelated operations and processes such as a blending agent added to other fuels. For example, to lower viscosity;purchase, sales, aggregation, processing, and re-refining.
“CrackCatalytic Reforming” means breaking apart crude oilis a process that uses heat, pressure, and a catalyst to convert low-octane naphthas into its component products, including gases like propane, heating fuel,high-octane gasoline light distillates like jet fuel, intermediate distillates like diesel fuel and heavy distillates like grease;
“Exchange Act” refers to the Securities Exchange Act of 1934, as amended;
“Feedstock” means a product or a combination of products derived from crude oil and destined for further processing in the refining or re-refining industries. It is transformed into one or more components and/or finished products;
“Gasoline Blendstock” means naphthas and various distillate products used for blending or compounding into finished motor gasoline. These components can include reformulated gasoline blendstock for oxygenate blending (RBOB) but exclude oxygenates (alcohols and ethers), butane, and pentanes (an organic compound with properties similar to a butane);components.
“HydrotreatingCracking” refers to the process of breaking down larger, heavier, and more complex hydrocarbon molecules into simpler and lighter molecules through the use of heat, pressure, and sometimes a catalyst.
“Crude oil distillation” means the process of reactingdistilling vapor from liquid crudes, usually by heating and condensing the vapor slightly above atmospheric pressure turning it back to liquid in order to purify, fractionate or form the desired products.
“Cutterstock” also known as “cutter stock”, refers to any stream that is blended to adjust various properties of the resulting blend.
“Generator” means any person, by site, whose act or process produces used oil fractions with hydrogen in the presence of a catalystor whose act first causes used oil to become subject to regulation. Generators can be service stations, governments or other businesses that produce high-value clean products;or receive used oil.
“IMO 2020” refers to the International Maritime Organization’s rule, effective January 1, 2020, the International Maritime Organization (IMO) mandated a maximum sulphurwhich limited sulfur content of 0.5% in marine fuels globally;used on board ships operating outside designated emission control areas to 0.50% mass by mass.
“MDOLLS” means marine diesel oil, which is a type of fuel oilLouisiana Light Sweet Crude and is a blendgrade of gasoil and heavy fuelcrude oil with less gasoil than intermediate fuel oil used in the maritime field;classified by its low sulfur content.
“NaphthasLPG” means any of various volatile, highly flammable liquid hydrocarbon mixtures used chiefly as solvents and diluents and as raw materials for conversion to gasoline;liquefied petroleum gases.
“OlefinLubricant” or “lube” means unsaturated hydrocarbons containing a double bond between two carbon atoms. Examples are butylenesolvent-neutral paraffinic product used in commercial heavy-duty engine oils, passenger car oils, and propylene.specialty products for industrial applications such as heat transfer, metalworking, rubber, and other general process oil.
“PygasMBL” means pyrolysis gasoline, an aromatics-rich gasoline stream produced in sizeable quantities by an ethylene plant. These plants are designed to crack a number of feedstocks, including ethane, propane, naphtha, and gasoil. Pygas can serve as a high-octane blendstock for motor gasoline or as a feedstock for an aromatics extraction unit;one thousand barrels.
“SEC” or the “CommissionRe-Refining” refers to the United States Securitiesprocess or industry which uses refining processes and Exchange Commission;technology with used oil as a feedstock to produce high-quality base stocks and intermediate feedstocks for lubricants, fuels, and other petroleum products.
“Securities ActRefining adjusted EBITDA” refers to the Securities Act of 1933, as amended;represents net income (loss) from operations minus depreciation and amortization, unrealized gains and losses on hedging activities, gain and loss on intermediation agreement, and unusual or non-recurring charges included in selling, general, and administrative expenses.
“VGORefining gross margin” refers to Vacuum Gas Oil (also knownis defined as cat feed) -a feedstock for a fluid catalytic cracker typically found in a crude oil refinery and used to make gasoline No. 2 oilrevenues less the cost of fuel intakes and other byproducts.fuel costs. It excludes operating expenses and depreciation attributable to cost of revenues and other non-operating items included in costs of revenues.
“Refining gross margin per barrel of throughput” is calculated as refining gross margin divided by total throughput barrels for the period presented.
“Reformate” is a gasoline blending stock produced by catalytic reforming.
“Renewable Diesel” means a diesel fuel derived from vegetable oils or animal fats that is produced through various processes, most commonly through hydrotreating, reacting the feedstock with hydrogen under temperatures and pressure in the presence of a catalyst.
“RINs” means renewable identification numbers and refers to serial numbers assigned to credits generated from renewable fuel production under the Environmental Protection Agency’s Renewable Fuel Standard (“RFS”) regulations, which require blending renewable fuels into the nation’s fuel supply. In lieu of blending, refiners may purchase these transferable credits to comply with the regulations.
“Sour Crude Oil” refers to crude oil containing quantities of sulfur greater than 0.4 percent by weight.
“Sweet Crude Oil” refers to crude oil containing quantities of sulfur equal to or less than 0.4 percent by weight.
“UMO” is the abbreviation for used motor oil.
“Vacuum Distillation” is the process of distilling vapor from liquid crudes, usually by heating and condensing the vapor below atmospheric pressure turning it back to a liquid in order to purify, fractionate or form the desired products.
“Vacuum Gas Oil” or “VGO” is a product produced from a vacuum distillation column which is predominately used as an intermediate feedstock to produce transportation fuels and other by-products such as gasoline, diesel and marine fuels.
“VTB” refers to vacuum tower bottoms, the leftover bottom product of distillation, which can be processed in cokers and used for upgrading into gasoline, diesel, and gas oil.
Where You Can Find Other Information
We file annual, quarterly, and current reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”). Our SEC filings (reports, proxy and information statements, and other information) are available to the public over the Internet at the SEC’s website at www.sec.gov and are available for download, free of charge, soon after such reports are filed with or furnished to the SEC, on the “Investor Relations,” “SEC Filings” page of our website at www.vertexenergy.com. Information on our website is not part of this Report, and we do not desire to incorporate by reference such information herein. Copies of documents filed by us with the SEC are also available from us without charge, upon oral or written request to our Secretary, who can be contacted at the address and telephone number set forth on the cover page of this Report.
Summary of The Information Contained in Management’s Discussion and Analysis of Financial Condition and Results of Operations
Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is provided in addition to the accompanying unaudited consolidated financial statements and notes to assist readers in understanding our results of operations, financial condition, and cash flows. MD&A is organized as follows:
•Strategy and Plan of Operations. Discussion of our current strategy and plan of operations.
•Description of Business Activities. Discussion of our business and overall analysis of financial and other highlights affecting us, to provide context for the remainder of MD&A.
•Results of Operations. An analysis of our financial results comparing the six and three months ended March 31,June 30, 2022, and 2021.
•Liquidity and Capital Resources. An analysis of changes in our consolidated balance sheets and cash flows and discussion of our financial condition.
•Critical Accounting Policies and Use of Estimates. Accounting estimates that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results and forecasts.
Strategy and Plan of Operations
The principal elements of our strategy include:
•Completion of Renewable Diesel Conversion Project. We are in the process of completing a renewable diesel conversion project designed to modify the Mobile Refinery's hydrocracking unit to produce renewable diesel fuel on a standalone basis. To date, we have technology, engineering and construction partners and construction of foundations and fabrication of piping has commenced. Initial renewable production volumes are expected to come on-stream by the first quarter 2023. The Company expects the total project cost to be in the range of $90 to $100 million, funded entirely through existing cash on-hand and cash flow from operations.
•Expand Feedstock Supply Volume. We intend to expand our feedstock supply volume by growing our collection and aggregation operations. We plan to increase the volume of feedstock we collect directly by developing new relationships with generators and working to displace incumbent collectors; increasing the number of collection personnel, vehicles, equipment, and geographical areas we serve; and acquiring collectors in new or existing territories. We intend to increase the volume of feedstock we aggregate from third-party collectors by expanding our existing relationships and developing new vendor relationships. We believe that our ability to acquire large feedstock volumes will help to cultivate new vendor relationships because collectors often prefer to work with a single, reliable customer rather than manage multiple relationships and the uncertainty of excess inventory.
•Broaden Existing Customer Relationships and Secure New Large Accounts. We intend to broaden our existing customer relationships by increasing sales of used motor oil and re-refined products to these accounts. In some cases, we may also seek to serve as our customers’ primary or exclusive supplier. We also believe that as we increase our supply of feedstock and re-refined products that we will secure larger customer accounts that require a partner who can consistently deliver high volumes.
•Re-Refine Higher Value End Products. We intend to develop, lease, or acquire technologies to re-refine our feedstock supply into higher-value end products. We believe that the expansion of our facilities and our technology, and investments in additional technologies, will enable us to upgrade feedstock into end products, such as lubricating base oil, that command higher market prices than the current re-refined products we produce.
•Pursue Selective Strategic Relationships or Acquisitions. We plan to grow market share by consolidating feedstock supply through partnering with or acquiring collection and aggregation assets. Such acquisitions and/or partnerships could increase our revenue and provide better control over the quality and quantity of feedstock available for resale and/or upgrading as well as providing additional locations. In addition, we intend to pursue further vertical integration opportunities by acquiring complementary processing technologies where we can realize synergies by leveraging our customer and vendor relationships, infrastructure, and personnel, and by eliminating duplicative overhead costs.
Description of Business Activities
The below
Below is a discussion of our business activities during the quarters ended March 31,June 30, 2022, and 2021. Effective April 1, 2022, we completed the acquisition of the Mobile Refinery (as discussed and defined below). Moving forward, in addition to theAs a result, since April 1, 2022 business activities described below,, our operations will also include the operation of the Mobile Refinery. The Mobile Refinery and related logistics assets (“Logistics Assets”) are a group of downstream assets that operate ten miles north of Mobile, in Saraland, Alabama, which include the Mobile Refinery and Blakeley Island Terminal, a deep waterdeep-water draft, bulk loading terminal facility, for crude oil and associated refined petroleum products located in Mobile, Alabama, with 600,000 Bbls of storage for loading/unloading of vessels along with a pipeline tie-in, as well as the related logistics infrastructure of a high capacity truck with 3-4 loading heads per truck, each rated at 600 gallons per minute (the “Mobile Truck Rack”). The Mobile Refinery currently processes heavy and sour crude to produce heavy olefin feed, regular gasoline, premium gasoline, jet fuel, and diesel fuel. It is anticipated that thisThis activity will fallfalls in the financial results of our Refining and Marketing segment during the three months ended June 30, 2022. It is anticipated that theThe Mobile Refinery willhas substantially changechanged our overall revenue, cost of revenue, net income, and earnings before interest, taxes, depreciation, and amortization moving forward. and during the three months ended June 30, 2022, represented 93% of our total revenue.
The below description is of our business activities during the periods reported (the threesix months ended March 31,June 30, 2022, and 2021), and does not include significant information regarding the Mobile Refinery and Logistic Assets since those were acquired after the end of the period covered by this Report, on April 1, 2022. .
We areVertex is an environmental servicesenergy transition company that recycles industrial waste streamsspecializing in refining and off-specification commercial chemical products. Our primary focus is recycling used motor oilmarketing high-value conventional and other petroleum by-products.lower-carbon alternative transportation fuels. We are engaged in operations across the entire petroleum recycling value chain, including collection, aggregation, transportation, storage, re-refinement,refinement, and sales of aggregated feedstock and re-refinedrefined products to end users.end-users. We operate in three segments:
(1) Black Oil,
(2) Refining and Marketing, and
(3) Recovery.
We currently provide our services in 15 states, primarily in the Gulf Coast,, Midwest, and Mid-Atlantic regions of the United States. For the rolling twelve-month period ending March 31,June 30, 2022, we aggregated approximately 87.887.4 million gallons of used motor oil and other petroleum by-product feedstocks and managed the re-refining of approximately 80.080.4 million gallons of used motor oil with our proprietary vacuum gas oil (“VGO”VGO”) and Base Oil processes.
Our Black Oil segment collects and purchases used motor oil directly from third-party generators, aggregates used motor oil from an established network of local and regional collectors and sells used motor oil to our customers for use as a feedstock or replacement fuel for industrial burners. We operate a refining facility that uses our proprietary Thermal Chemical Extraction Process (“TCEP”), and we also utilize third-party processing facilities. TCEP’s original purpose was to re-finere-refine used oil into marine cutterstock; however, between the third quarter of 2015 and the third quarter of 2019, and since the first quarter of 2020, the original purpose of TCEP has not been economically viable, and we have instead been using TCEP to re-finepre-treat used oil into marine cutterstock;feedstock; prior to shipping to our facility in Marrero, Louisiana.
We also acquired ouroperate a facility located in Marrero, Louisiana, facility, which facility re-refines used motor oil and also produces VGO, and the Myrtle Grovea re-refining complex located in Belle Chasse, Louisiana, which we callrefer to as our Myrtle Grove facility (which is now owned by a special purpose entity which we owned 85% interest of through March 31, 2022, and own a 100% interest in, as of April 1, 2022) in May 2014.facility.
Our Refining and Marketing segment aggregates and manages the re-refinementrefining of used motorcrude oil and other petroleum by-products and sells the re-refinedthose refined products to end customers.
Our Recovery segment includes a generator solutions company for the proper recoveryproperly recovering and management ofmanaging hydrocarbon streams as well asand metals, which includesincluding transportation and marine salvage services throughout the Gulf Coast.
Black Oil Segment
Discontinued operations of Vertex includes the Black Oil Segment, also referred to as the UMO Business, Refer to Note 15,16, "Discontinued Operations" in the Notes to Financial Statements for additional information.
Our Black Oil segment is engaged in operations across the entire used motor oil recycling value chain, including collection, aggregation, transportation, storage, refinement, and sales of aggregated feedstock and re-refined products to end users.end-users. We collect and purchase used oil directly from generators such as oil change service stations, automotive repair shops, manufacturing facilities, petroleum refineries, and petrochemical manufacturing operations. We own a fleet of 43 collection vehicles, which routinely visit generators to collect and purchase used motor oil. We also aggregate used oil from a diverse network of approximately 50 suppliers who operate similar collection businesses to ours.
We manage the logistics of transport, storage, and delivery of used oil to our customers. Prior to the completion of the Mobile Refinery Acquisition, and during the period covered by this Report, we owned a fleet of 3043 transportation trucks and more than 80 above groundabove-ground storage tanks with over 8.6 million gallons of storage capacity. These assets are used by both the Black Oil segment and the Refining and Marketing segment.segments. In addition, we also utilize third parties for the transportation and storage of used oil feedstocks. Typically, we sell used oil to our customers in bulk to ensure efficient delivery by truck, rail, or barge. In many cases, we have contractual purchase and sale agreements with our suppliers and customers, respectively. We believe these contracts are beneficial to all parties involved because it ensures that a minimum volume is purchased from collectors and generators, a minimum volume is sold to our customers, and we are able to minimize our inventory risk by a spread between the costs to acquire used oil and the revenues received from the sale and delivery of used oil. Also, as discussed above under “Description of Business Activities”, from time to time, when market conditions warrant (i.e., when oil prices are sufficiently high), we have used our proprietary TCEP technology to re-refine used oil into marine fuel cutterstock, provided that we are currently using such technology solely to pre-treat our used motor oil feedstock prior to shipping to our facility in Marrero, Louisiana. In addition, at our Marrero, Louisiana facility, we produce a Vacuum Gas Oil (VGO) product that is sold to refineries as well as tofor the marine fuels market. At our Columbus, Ohio facility (Heartland Petroleum), the ownership of 65% of which was transferred to Tensile in connection with the Heartland SPV (discussed above), effective January 1, 2020, we produce a base oil product thatwhich in turn is sold to lubricant packagers and distributors.
Refining and Marketing Segment
Our Refining and Marketing segment is engaged in the aggregation of feedstock, re-refining it into higher valuehigher-value end products, and selling these products to our customers, as well as related transportation and storage activities. We aggregate a diverse mix of feedstocks, including used motor oil, petroleum distillates, transmix, and other off-specification chemical products. These feedstock streams are purchased from pipeline operators, refineries, chemical processing facilities, and third-party providers and are also transferred from our Black Oil segment. We have a toll-based processing agreement in place with Monument Chemical Port Arthur, LLC ("(“Monument Chemical"Chemical”) to re-refine feedstock streams, under our direction, into various end products that we specify. Monument Chemical uses industry standardindustry-standard processing technologies to re-refine our feedstocks into pygas, gasoline blendstock, and marine fuel oil cutterstock. We sell all of our re-refined products directly to end-customersend 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 partythird-party customers who typically resell these products to retailers and end consumers.
In addition, the newly acquired Mobile, Alabama facility is included in this segment. The Mobile Refinery and Logistics Assets are a group of downstream assets and related logistics infrastructure of the Mobile Truck Rack. The Mobile Refinery currently processes heavy and sour crude to produce vacuum gas oil (VGO), heavy olefin feed, regular gasoline, jet fuel and diesel fuel, vacuum tower bottoms (VTBs), and other incremental products such as LPGs, sulfur, and reformate. We are also currently in the process of completing a renewable diesel conversion project designed to modify the Mobile Refinery's hydrocracking unit to produce renewable diesel fuel on a standalone basis, as discussed above.
Recovery Segment
The Company’s Recovery Segment includes a generator solutions company for the proper recovery and management of hydrocarbon streams and other petroleum-based products, together with the recovery and processing of metals.
Thermal Chemical Extraction Process
We own the intellectual property for our patented TCEP. TCEP is a technology which utilizes thermal and chemical dynamics to extract impurities from used oil which increases the value of the feedstock. We intend to continue to develop our TCEP technology and design with the goal of producing additional re-refined products, including lubricating base oil.
TCEP differs from conventional re-refining technologies, such as vacuum distillation and hydrotreatment, by relying more heavily on chemical processes to remove impurities rather than temperature and pressure. Therefore, the capital requirements to build a TCEP plant are typically much less than a traditional re-refinery because large feed heaters, vacuum distillation columns, and a hydrotreating unit are not required. The end product currently produced by TCEP is used as fuel oil
cutterstock. Conventional re-refineries produce lubricating base oils or product grades slightly lower than base oil that can be used as industrial fuels or transportation fuel blendstocks.
We currently estimate the cost to construct a new, fully-functional, commercial facility using our TCEP technology, with annual processing capacity of between 25 and 50 million gallons at another location would be approximately $10 - $15 million, which could fluctuate based on throughput capacity. The facility infrastructure would require additional capitalized expenditures which would depend on the location and site specifics of the facility. Our TCEP technology converts feedstock into a low sulfur marine fuel that can be sold into the new 0.5% low sulfur marine fuel specification mandated under International Maritime Organization (IMO) rules which went into effect on January 1, 2020. As described above, due to the decline in oil prices and challenges in obtaining feedstock in the early part of 2020, we have been using TCEP for the purposes of pre-treating our used motor oil feedstock prior to shipping to our facility in Marrero, Louisiana since the first quarter of 2020. We may construct additional TCEP facilities in the future if oil prices continue to increase.
Products and Services
We generate substantially allthe majority of our revenue from the providing ofrefining petroleum products, oil collection services, and salesales of ninethe below product categories.categories, and gasolines, jet fuels and diesel. All of these products are commodities that are subject to various degrees of product quality and performance specifications.
Base Oil
Base oil is an oil to which other oils, additives, or substancesother compounds are added to producemanufacture a finished lubricant. Typically, the mainThe primary substance in lubricants, base oils, areoil, can be refined from crude oil.oil or re-refined from used motor oils.
Pygas
Pygas, or pyrolysis gasoline, is a product that can be blended with gasoline as an octane booster or that can be distilled and separated into its components, including benzene and other hydrocarbons.
Industrial Fuel
Industrial fuel is a distillate fuel oil, which is typically a blend of lower qualitylower-quality fuel oils. It can include diesel fuels and fuel oils such as No. 1, No. 2, and No. 4 diesel fuels that are historically used for space heating and power generation.Industrial fuel is typically a fuel with low viscosity, as well as low sulfur, ash, and heavy metal content, making it an ideal blending agent.
Distillates
Distillates are finished fuel products such as gasolinekerosene and diesel fuels.
Oil Collection Services
Oil collection services include the collection, handling, treatment, and salestransacting of used motor oil and related products which includecontain used motor oil (such as oil filters) which are collectedfilters and absorbents) acquired from our customers.
Metals
Metals consist of recoverable ferrous and non-ferrous recyclable metals from manufacturing and consumption. Scrap metal can be recovered from pipes, barges, boats, building supplies, surplus equipment, tanks, and other items consisting of metal composition. These materials are segregated, processed, cut-upcut up, and sent back to a steel mill for re-purposing.
Other refinery products
Other re-refinery products
Other re-refineryrefinery products include the sales of asphalt, condensate, recovered products, and other petroleum products.
VGO/Marine fuel sales
VGO/Marine fuel sales relate to the sale of low sulfur fuel meeting the criteria for IMO 2020 compliant marine fuels.
Olefins
HydrotreatedOlefins are hydrotreated VGO.
The way that the product categories above fit into our three operating segments, (1) Black Oil; (2) Refining and Marketing; and (3) Recovery, are indicated below:
| | | | | | | | | | | |
| Black Oil(1) | Refining and Marketing(2) | Recovery(3) |
Base oil | XGasolines | | X |
Pygas | | X | |
Industrial fuelJet Fuels | X | X | |
DistillatesDiesel | | X | |
Oil collection servicesBase oil | X | | X |
Pygas | | X | |
Industrial fuel | X | X | |
| | | |
Oil collection services | X | | |
Metals | | | X |
Other re-refineryrefinery products | X | X | X |
VGO/Marine fuel sales | X | | |
(1) As discussed in greater detail above under “Black Oil Segment”, the Black Oil segment consists primarily of the sale of (a) petroleum products which include base oil and industrial fuels—which consist of used motor oils, cutterstock, and fuel oil
generated by our facilities; (b) oil collection services—which consist of used oil sales, burner fuel sales, antifreeze sales and service charges; (c) the sale of other re-refinery products including asphalt, condensate, recovered products, and used motor oil; (d) transportation revenues; and (e) the sale of VGO (vacuum gas oil)/marine fuel.
(2) As discussed in greater detail above under “Refining and Marketing Segment”, the Refining and Marketing segment consists primarily of the sale of pygas;refined finished products which include jet fuel, gasolines, diesels, LPGs, residual fuels which are produced at our Mobile Refinery along with pygas and industrial fuels, which are produced at a third-party facility ("Monument Chemical"); and distillates..
(3) As discussed in greater detail above under “Recovery Segment”, the Recovery segment consists primarily of revenues generated from the sale of ferrous and non-ferrous recyclable Metal(s)metal(s) products that are recovered from manufacturing and consumption.
Recent Events
Approval of Issuance of Shares
On January 20, 2022, our shareholders approved the issuance of shares of our common stock issuable upon the conversion of our $155 million aggregate principal amount at maturity 6.25% Convertible Senior Notes due 2027 in accordance with Nasdaq Listing Rules 5635 (a) and (d). As a result, as described in that certain Indenture, dated November 1, 2021, between the Company and U.S. Bank National Association, as trustee, setting forth the terms of the Convertible Senior Notes, the Default Settlement Method (as defined in the Indenture) of the Convertible Senior Notes automatically changed to Physical Settlement (as defined in the Indenture).
Voluntary Termination of Sales Agreement with Safety-Kleen
In September of 2021, the U.S. Federal Trade Commission (FTC) submitted a second request for additional review, prompting a prolonged period of costly support efforts on both the part of the Company and Safety-Kleen Systems, Inc., as purchaser (“Safety-Kleen”) relating to FTC approval for the Sale Transaction (i.e., the planned sale of our UMO Business to Safety-Kleen). Given the considerable time and resources required to continue these support efforts, the Company determined that it was no longer in the Company's best interest to pursue the transaction further.
On January 25, 2022, the Company entered into a mutual agreement with Safety-Kleen to terminate the Sale Agreement. In connection with the termination agreement, the Company paid Safety-Kleen a break-up fee of $3 million.
We are continuing to explore opportunities for the sale of the UMO Business.
Idemitsu Offtake Agreement
On February 14, 2022, Vertex Refining Alabama LLC (“Vertex Refining”), a wholly-owned subsidiary of the Company, entered into a Master Offtake Agreement dated February 4, 2022 (the “Offtake Agreement”) with Idemitsu Apollo Renewable Corp. (“Idemitsu”). Pursuant to the Offtake Agreement, Vertex Refining agreed to sell Idemitsu renewable diesel which is planned to be produced by the Mobile Refinery, subject to completion of the acquisition of the Mobile Refinery and the capital project discussed above. During the term of the Offtake Agreement, Idemitsu agreed to purchase all of the renewable diesel produced at the refinery (provided it meets certain specifications), up to a maximum volume of 14,000 barrels per day.
Pursuant to the Offtake Agreement, Idemitsu shall be the exclusive offtake party for certain amounts of renewable diesel produced by Vertex Refining, up to a total of 14,000 barrels of renewable diesel, provided that if Idemitsu fails to purchase or accept any portion of such committed volume in accordance with the terms of the Offtake Agreement, Vertex Refining has the right to sell such product and regulatory credits to a third-party. Vertex Refining is also required to transfer all regulatory credits associated with the product purchased to Idemitsu pursuant to the terms of the Offtake Agreement.
The obligations of the parties under the Offtake Agreement are subject to certain conditions precedent and also include a requirement that Idemitsu pay for certain minimum volumes of renewable diesels per month and that Vertex Refining supply certain minimum volumes per month, subject to certain make whole payments or reimbursements due from the appropriate party.
In the event the refinery produces and Vertex Refining offers for sale during the term of the agreement, renewable products other than renewable diesel (“Other Renewable Products”), prior to offering the Other Renewable Products to any third party, Vertex Refining is required to first offer such products to Idemitsu and Idemitsu has a 14 day right of first refusal to purchase such Other Renewable Products.
Idemitsu agreed to pay to Vertex Refining a per gallon of product purchased at an indexed, spot-market price at the time of production.
Pursuant to the Offtake Agreement, Idemitsu has the right, but not the obligation, to purchase from Vertex Refining, quantities of ultra low sulfur diesel (“ULSD”), up to an amount required by Idemitsu to blend with the renewal diesel to a ratio of 0.1% ULSD or greater; provided that Vertex Refining has such volumes available for sale. The purchase price for any ULSD purchased by Idemitsu from Vertex shall be the monthly average of the daily prompt CME Group ULSD futures (heating oil) settlement for each day during the month in which delivery occurred.
As a condition to the effectiveness of the Offtake Agreement, Idemitsu’s parent entity, Idemitsu Kosan Co., Ltd. (“Idemitsu Parent”), must enter into a Continuing Guaranty in favor of Vertex Refining (the “Guaranty”) prior to COD. Pursuant to the Guaranty, Idemitsu's Parent will guaranty the full and prompt payment when due, whether upon acceleration, demand or otherwise, and at all times thereafter, of the indebtedness of Idemitsu under the Offtake Agreement and related agreements and the punctual performance of all of such payment obligations under the Offtake Agreement, with such liability limited to the lesser of (i) the amounts owed to Vertex Refining under the Offtake Agreement and related agreements; and (ii) $100,000,000. The Guaranty will have customary covenants and requirements, including requiring Idemitsu's Parent to subordinate any debt owed by Idemitsu to Idemitsu's Parent to the obligations to Vertex Refining under the Guaranty.
Commitment Letter
On February 17, 2022, the Company and the Company’s wholly-owned subsidiary, Vertex Refining, entered into a Commitment Letter with a syndicate of lenders in respect of a three-year, $125 million first-lien senior secured term loan facility (the “Term Loan”). The closing date and the funding of the Term Loan are subject to the closing of the Mobile Acquisition, in addition to various conditions precedent, as set forth in more detail in the Commitment Letter.
On March 2, 2022, (1) the Company, (2) Vertex Refining, (3) the Lenders and (4) Cantor Fitzgerald Securities (the “Escrow Agent”), entered into an Escrow Agreement (the “Escrow Agreement”). Pursuant to the Escrow Agreement, on March 2, 2022 each of the Lenders deposited their pro rata portion of the $125 million loan amount, less certain upfront fees, into an escrow account. The Company was required to pay a ‘ticking fee’ equal to 10.5% per annum on the gross aggregate amount of escrow account proceeds, beginning on March 2, 2022, which was the date funds were deposited, into the escrow account. As described in greater detail below, the escrow account proceeds were released to the Company on April 1, 2022, in connection with the closing of the Mobile Acquisition.
Exchange Agreement
On March 24, 2022, we entered into an Exchange Agreement (the “Exchange Agreement”) with Tensile Capital Partners Master Fund LP (the “Holder”). Pursuant to the Exchange Agreement, the Holder agreed to exchange outstanding warrants to purchase 1,500,000 shares of the Company’s common stock with an exercise price of $2.25 per share and an expiration date of July 25, 2029, for 1,112,728 shares of the Company’s common stock, effectively resulting in a net cashless exercise of the warrants (which were cancelled in connection with the transaction), with the value of such surrendered shares based on the five day trailing volume weighted average price of the Company’s common stock. The Exchange Agreement included customary representations and warranties of the parties.
Heartland and Myrtle Grove Purchase Agreements
On February 25, 2022, Vertex Splitter Corporation (“Vertex Splitter”), a wholly-owned subsidiary of the Company entered into (1) a Purchase and Sale Agreement with Tensile-Vertex Holdings LLC (“Tensile-Vertex”), an affiliate of Tensile and Tensile-Heartland (the “Heartland Purchase Agreement”); and (2) a Purchase and Sale Agreement with Tensile-Vertex and Tensile-MG (the “Myrtle Grove Purchase Agreement”, and together with the Heartland Purchase Agreement, the “Purchase Agreements”).
As the time of the entry into the agreement, Tensile-Heartland held 65% of Heartland SPV and Tensile-MG owned 15% of MG SPV, with Tensile-Vertex holding 100% of both Tensile-Heartland and Tensile-MG.
Pursuant to the Heartland Purchase Agreement, the Company, through Vertex Splitter, agreed to acquire 100% of the outstanding securities of Tensile-Heartland and pursuant to the Myrtle Grove Purchase Agreement, the Company, through Vertex Splitter, agreed to acquire 100% of the outstanding securities of Tensile-MG, from Vertex-Tensile,Tensile-Vertex, the result of which will be that Vertex Splitter will own 100% of each of Heartland SPV and MG SPV.
Pursuant to the Heartland Purchase Agreement, the purchase price payable by Vertex Splitter to Vertex-Tensile, for 100% of Tensile-Heartland is $35 million (the “Base Amount”), plus an amount accrued and accruing from and after May 31, 2021, on the Base Amount on a daily basis at the rate of 22.5% per annum compounded on the last day of each calendar quarter plus an amount equal to any and all cash and cash equivalents of Tensile-Heartland, as of the closing date, which we currently anticipate will total an aggregate of approximately $44 million. The purchase contemplated by the Heartland Purchase Agreement is required to take place on June 30, 2022, or earlier as mutually agreed by the parties, subject to customary conditions to closing. The Heartland Purchase Agreement includes customary representations of the parties, requires Vertex Splitter to maintain officer and director insurance for Tensile-Heartland for at least six years following the closing; requires that they bear their own fees and expenses, except that each party is required to pay the fees and expenses of the other party upon termination of the agreement in certain situations; includes customary indemnification obligations; and includes mutual releases of the parties, effective upon closing.
The Heartland Purchase Agreement may be terminated prior to closing, by the mutual consent of the parties; by Vertex Splitter if Vertex-Tensile has failed to consummate the agreement, or breached a covenant, representation or warranty set forth in the agreement, that prevents such closing, and such breach is not cured, if capable of being cured, within 30 days after notice thereof; by Vertex-Tensile if Vertex Splitter has failed to consummate the agreement, or breached a covenant, representation or warranty set forth in the agreement, that prevents such closing, and such breach is not cured, if capable of being cured, within 30 days after notice thereof; or by either party if there is a final, non-appealable judgment preventing the closing.
Pursuant to the Myrtle Grove Purchase Agreement, the purchase price payable by Vertex Splitter to Vertex-Tensile, for 100% of Tensile-MG was estimated to be approximately $7 million, and was to be based on the value of the Class B Unit preference of MG SPV held by Tensile-MG, plus capital invested by Tensile-MG in MG SPV (which has not been returned as of the date of payment), plus cash and cash equivalents held by Tensile-MG as of the closing date. The purchase contemplated by the Myrtle Grove Purchase Agreement was required to take place on March 31, 2022, or earlier as mutually agreed by the parties, subject to customary conditions to closing.
On April 1, 2022, the Company, through Vertex Splitter acquired 100% of Tensile-MG from Vertex-TensileTensile-Vertex for $7.2 million, which was based on the value of the Class B Unit preference of MG SPV held by Tensile-MG, plus capital invested by Tensile-MG in MG SPV (which had not been returned as of the date of payment), plus cash and cash equivalents held by Tensile-MG as of the closing date. As a result, the Company indirectly acquired 100% of MG SPV, which in turn owns the Company’s Belle Chasse, Louisiana, re-refining complex, and consequently the Company, as of April 1, 2022, owns 100% of the Belle Chasse, Louisiana, re-refining complex.
The Myrtle Grove Purchase Agreement included customary representations of the parties for a transaction of that size and type, requires Vertex Splitter to maintain officer and director insurance for Tensile-MG for at least six years following the
closing; requires that each party bear their own fees and expenses; includes customary indemnification obligations; and includes mutual releases of the parties, which were effective upon closing.
On May 26, 2022, the Company, through Vertex Splitter acquired 100% of Tensile-Heartland from Tensile-Vertex for $43.5 million, which was equal to $35 million (the “Base Amount”), plus an amount accrued and accruing from and after May 31, 2021, on the Base Amount on a daily basis at the rate of 22.5% per annum compounded on the last day of each calendar quarter plus an amount equal to any and all cash and cash equivalents of Tensile-Heartland, as of the closing date. As a result of the closing, the Company acquired 100% of Heartland SPV, which in turn owns the Company’s Columbus, Ohio, Heartland facility.
The Heartland Purchase Agreement included customary representations of the parties, requires Vertex Splitter to maintain officer and director insurance for Tensile-Heartland for at least six years following the closing; requires that the parties bear their own fees and expenses; includes customary indemnification obligations; and includes mutual releases of the parties, which were effective upon closing.
The Company used funds from the Additional Term Loan to pay amounts due under the Heartland Purchase Agreement.
Heartland Note Amendment
Also on February 25, 2022, Vertex Operating, the Company and Heartland SPV, entered into a Second Amendment to Promissory Note (the “Second Note Amendment”), which amended the Heartland Note, to extend the due date of the Heartland Note until the earlier of (i) June 30, 2022; and (ii) five (5) calendar days following the closing of a sale of substantially all the assets of Vertex Refining OH, LLC (“Vertex OHOhio”), and/or the sale of membership interests in Vertex OHOhio possessing voting control (with the consent of the Company), provided that the Heartland Note may be prepaid in whole or in part at any time without premium or penalty and without the consent of Heartland SPV. The Heartland Note accrues interest at the applicable federal rate of interest from time to time, increasing to 12% upon an event of default. On May 26, 2022, the Heartland Note was forgiven after the completion of the Tensile-Heartland transaction as noted above as an inter-company transaction.
Loan and Security Agreement
On April 1, 2022 (the “Closing Date”), Vertex Refining; the Company, as a guarantor; substantially all of the Company’s direct and indirect subsidiaries, as guarantors (together with the Company, the “Guarantors”); certain funds and accounts under management by BlackRock Financial Management, Inc. or its affiliates, as lenders (“BlackRock”), certain funds managed or advised by Whitebox Advisors, LLC, as lenders (“Whitebox”), certain funds managed by Highbridge Capital Management, LLC, as lenders (“Highbridge”), Chambers Energy Capital IV, LP, as a lender (“Chambers”), CrowdOut Capital LLC, as a lender (“CrowdOut Capital”), CrowdOut Credit Opportunities Fund LLC, as a lender (collectively with BlackRock, Whitebox, Highbridge, Chambers and CrowdOut Capital, the “Lenders”); and Cantor Fitzgerald Securities, in its capacity as administrative agent and collateral agent for the Lenders (the “Agent”), entered into a Loan and Security Agreement (the “Loan and Security Agreement”).
Pursuant to the Loan and Security Agreement, the Lenders agreed to provide a $125 million term loan to Vertex Refining (the “Initial Term Loan”), the proceeds of which, less agreed upon fees and discounts, were held in escrow prior to the Closing Date, pursuant to the Escrow Agreement, discussed above. On the Closing Date, net proceeds from the term loans, less the agreed upon fees and discounts, as well as certain transaction expenses, were released from escrow to Vertex Refining in an aggregate amount of $94,309,958.
The amounts borrowed under the Loan and Security Agreement bear interest at a rate per annum equal to the sum of (i) the greater of (x) the per annum rate publicly quoted from time to time by The Wall Street Journal as the “Prime Rate” in the United States minus 1.50% as in effect on such day and (y) the Federal Funds rate for such day plus 0.50%, subject in the case of this clause (i), to a floor of 1.0%, plus (ii) 9.25%. The funds borrowed in connection with the Term Loan were issued with an original issue discount of 1.5%. The Company also paid certain fees and transaction expenses in connection with the release of the funds in connection with the Term Loan. Amounts owed under the Loan and Security Agreement, if not earlier repaid, are due on April 1, 2025 (or the next business day thereafter). Interest on the Term Loan is payable in cash (i) quarterly, in arrears, on the last business day of each calendar quarter, commencing on the last business day of the calendar quarter ending June 30, 2022, (ii) in connection with any payment, prepayment or repayment of the Term Loan (including as discussed in greater detail below), and (iii) at maturity (whether upon demand, by acceleration or otherwise). Pursuant to the Loan and Security Agreement, on the last day of March, June, September and December of each year (or if such day is not a business day, the next succeeding business day), beginning on March 31, 2023 and ending on December 31, 2024, Vertex Refining is required to repay $1,562,500 of the principal amount owed under the Loan and Security Agreement (i.e., 1.25% of the original principal amount per quarter), subject to reductions in the event of any prepayment of the Loan and Security Agreement.
In the event of any payment, repayment or prepayment (other than with respect to a sale of the Company’s used motor oil assets or a change of control which are discussed below, and other than in connection with prepayments required to be made with funds received from insurance settlements and recoveries which are not subject to a prepayment premium), including in the event of acceleration of the Term Loan, certain asset sales (other than the used motor oil assets), certain equity issuances, and voluntary prepayments (a) during the first 18 months after the Closing Date, Vertex Refining agreed to pay an additional amount to the Lenders equal to 150% of the applicable interest rate, multiplied by the amount of such prepayment amount; (b) during the 19th through 24th months after the Closing Date, Vertex Refining agreed to pay an additional amount to the Lenders equal to 50% of the applicable interest rate, multiplied by the amount of such prepayment amount; and (c) at any time during the 25th month after the Closing Date, but prior to the date that is 90 days before the maturity date of amounts owed pursuant to the Loan and Security Agreement, Vertex Refining agreed to pay an additional amount to the Lenders equal to 25% of the applicable interest rate, multiplied by the amount of such prepayment amount. Upon the sale of the Company’s used motor oil assets (as discussed below), or the required repayment upon a change of control (also discussed below) Vertex Refining agreed to pay an additional amount to the Lenders equal to 1% of the aggregate principal amount of the amount prepaid (as applicable,
the “Prepayment Premium”). The Prepayment Premium is also due upon a change of control, which includes the direct or indirect transfer of all or substantially all of the assets of the Loan Parties (defined below); the adoption of a plan of liquidation or dissolution relating to the Company; the acquisition in one or a series of transactions of 33% or more of the equity interests of the Company by a person or entity; the Company’s failure to own 100% of Vertex Refining and the other Loan Parties, unless permitted by the Lenders; during any period of twelve consecutive months commencing on or after the Closing Date, the occurrence of a change in the composition of the Board of Directors of the Company such that a majority of the members of such Board of Directors are no longer directors; or a “change of control” or any comparable term under, and as defined in, any other indebtedness exceeding $2 million of the Loan Parties, shall have occurred (each a “Change of Control”).$94.3 million.
The Company used a portion of the proceeds from the Term Loan borrowing to pay a portion of the purchase price associated with the acquisition of the Mobile, Alabama refinery (the “Mobile Refinery”) acquired by Vertex Refining on April 1, 2022, as discussed in greater detail below, and to pay certain fees and expenses associated with the closing of the Loan and Security Agreement and is required to use the remainder of the funds for (i) the planned renewable diesel conversion of the Mobile Refinery, and (ii) working capital and liquidity needs.
The amounts borrowed pursuant to the terms of the Loan and Security Agreement are secured by substantially all of the present and after-acquired assets of the Company and its subsidiaries. Additionally, Vertex Refining’s obligations under the Loan and Security Agreement are jointly and severally guaranteed by substantially all of the Company’s subsidiaries and the Company (collectively, Vertex Refining, the Company and the Company’s subsidiaries which have guaranteed Vertex Refining’s obligations under the Loan and Security Agreement, each a “Loan Party” and collectively, the “Loan Parties”).
The Loan and Security Agreement includes customary representations and warranties, and affirmative and negative covenants of the Loan Parties for a facility of this size and type, including prohibiting the Loan Parties from creating any indebtedness without the consent of the Lenders, subject to certain exceptions, and requiring the Loan Parties to have no less than $17.5 million of unrestricted cash for more than three consecutive business days.
The Loan and Security Agreement includes customary events of default for transactions of this type, including failures to pay amounts due, bankruptcy proceedings, covenant defaults, attachment or seizure of a material portion of the collateral securing the Loan and Security Agreement, cross defaults, if there is a default in any agreement governing indebtedness in excess of $3,000,000, resulting in the right to accelerate such indebtedness, certain judgments against a Loan Party, misrepresentations by the Loan Parties in the transaction documents, insolvency, cross default of the Offtake and Supply Agreement (defined and described below), a Change of Control, termination of certain intercreditor agreements, and the loss or termination of certain material contacts. Upon the occurrence of an event of default the Agent may declare the entire amount of obligations owed under the Loan and Security Agreement immediately due and payable and take certain other actions provided for under the Loan and Security Agreement, including enforcing security interests and guarantees.
The Loan and Security Agreement includes customary indemnification obligations for a facility of this size and type, requiring us to indemnify the Agent and the Lenders for certain expenses, losses and claims.
In connection with the Loan and Security Agreement, and as additional consideration for the Lenders agreeing to loan funds to the Company thereunder, the Company granted warrants to purchase 2,750,0002.75 million shares of common stock of the Company to the Lenders (and/or their affiliates) on the Closing Date, as discussed in greater detail below.
The amounts owed under the Loan and Security Agreement are also secured by various deeds of trusts and mortgages for the real property(s) described therein, over the Mobile Refinery and substantially all other material owned and leased real property of the Guarantors including properties in Texas and Louisiana.
Intellectual Property Security Agreement
In connection with the entry into the Loan and Security Agreement, Vertex Energy Operating, LLC (“Vertex Operating”), the Company’s wholly-owned subsidiary, entered into an Intellectual Property Security Agreement in favor of the Agent, pursuant to which it granted a security interest in substantially all of its intellectual property (including patents and trademarks) in favor of the Lenders to secure the obligations of the Loan Parties under the Loan and Security Agreement.
Collateral Pledge Agreement
In connection with the entry into the Loan and Security Agreement, the Company, Vertex Refining and each of the Guarantors, entered into a Collateral Pledge Agreement in favor of the Agent, pursuant to which they granted the Agent a
security interest in all now owned or hereafter acquired promissory notes and instruments evidencing indebtedness to any Guarantor and all now owned or hereafter acquired equity interests owned by such Guarantor.
Intercreditor Agreement
In connection with the entry into the Loan and Security Agreement and the Supply and Offtake Agreement (as defined below), the Agent, Macquarie (as defined below), Vertex Refining and each of the Guarantors (collectively, the “Grantors”) entered into an intercreditor agreement (the “Intercreditor Agreement”) pursuant to which the Agent and Macquarie acknowledged each other’s liens on the assets of Vertex Refining. The intercreditor arrangements may limit our ability to amend the Loan and Security Agreement and the Supply and Offtake Agreement and related agreements, provides for certain restrictions on the exercise of remedies (through “standstill” and access periods) and governs certain creditor rights in bankruptcy proceedings relating to Grantors.
Completion of Mobile Refinery Acquisition
On April 1, 2022, Vertex Operating assigned its rights to the May 26, 2021 Sale and Purchase Agreement (the “Refinery Purchase Agreement”) to Vertex Refining and on the same date, Vertex Refining completed the Mobile Acquisition. On the Effective Date, a total of $75.0 million (less $10 million previously paid) was paid by Vertex Refining in consideration for the acquisition of the Mobile Refinery, which amount is subject to customary purchase price adjustments and reimbursement for certain capital expenditures in the amount of approximately $440,000,$440 thousand, $15.9 million was paid to Equilon Enterprises LLC d/b/a Shell Oil Products US, Shell Oil Company and Shell Chemical LP, subsidiaries of Shell plc (“Shell”) for previously agreed upon capital expenditures and miscellaneous prepaid and reimbursable items, and $164.2 million was paid to Shell by Vertex Refining in connection with the purchase of certain crude oil inventory and finished products owned by Shell and located at the Mobile Refinery on the Closing Date (approximately $154 million of which was funded by Macquarie as a result of the simultaneous sale of such inventory to Macquarie pursuant to an Inventory Sales Agreement between Vertex Refining and Macquarie). The Company also paid $8.7 million at closing pursuant to the terms of a Swapkit Purchase Agreement entered into with Shell on May 26, 2021 (the “Swapkit Agreement”), pursuant to which the Company agreed to fund a technology solution comprising the ecosystem required for the Company to run the Mobile Refinery after closing (the “Swapkit”).
Following the closing of the Mobile Acquisition, the Company (through one or more of its subsidiaries and affiliates) plans to complete an $85 million capitalAs discussed above, we have started a renewable diesel conversion project designed to modify the Mobile Refinery’sRefinery's hydrocracking unit to produce renewable diesel fuel on a standalone basis.basis, which has an estimated cost of $90 to $100 and is expected to be online during the first quarter of 2023.
Funds for the purchase of the Mobile Refinery, Swapkit Agreement, provision of cash collateral required pursuant to terms of the Supply and Offtake Agreement (discussed below), capital expenditures and transaction expenses, came from funds previously held in escrow in connection with our November 2021 sale of $155 million principal at maturity of 6.25% senior unsecured notes due 2027 ($100.4 million), the Term Loan and cash on hand. Following the transactions described above, including the Term Loan, and our acquisition of Tensile-MG (as defined and discussed below), our unrestricted cash increased by approximately $75 million, which funds are anticipated to be used for (i) the planned renewable diesel conversion of the Mobile Refinery, and (ii) working capital and liquidity needs.
Inventory and Finished Products Purchase and Sale
As a required condition to the closing of the Mobile Acquisition, on the Closing Date, Vertex Refining paid approximately $164.2 million for the acquisition from Shell, of all Mobile Refinery Inventory (defined and discussed below). Also on April 1, 2022, pursuant to an Inventory Sales Agreement entered into between Vertex Refining and Macquarie, Macquarie purchased all the Mobile Refinery Inventory from Vertex Refining for $154 million (which funds, together with cash on hand, were used by Vertex Refining to purchase the Mobile Refinery Inventory from Shell), which Mobile Refinery Inventory then became subject to the terms of the Supply and Offtake Agreement, discussed in detail below.
Supply and Offtake Agreement
On April 1, 2022 (the “Commencement Date”), Vertex Refining entered into a Supply and Offtake Agreement (the “Supply and Offtake Agreement”) with Macquarie Energy North America Trading Inc., a Delaware corporation (“Macquarie”), pertaining to crude oil supply and offtake of finished products located at the Mobile Refinery acquired on April 1, 2022. On the Commencement Date, pursuant to an Inventory Sales Agreement and in connection with the Supply and Offtake Agreement, Macquarie purchased from Vertex Refining all crude oil and finished products within the categories covered by the Supply and Offtake Agreement and the Inventory Sales Agreement, which were held at the Mobile Refinery and a certain specified third
party storage terminal, which were previously purchased by Vertex Refining as part of the acquisition of the Mobile Refinery as discussed in greater detail above.
Pursuant to the Supply and Offtake Agreement, beginning on the Commencement Date and subject to certain exceptions, substantially all of the crude oil located at the Mobile Refinery and at a specified third party storage terminal from time to time will be owned by Macquarie prior to its sale to Vertex Refining for consumption within the Mobile Refinery processing units. Also pursuant to the Supply and Offtake Agreement, and subject to the terms and conditions and certain exceptions set forth therein, Macquarie will purchase from Vertex Refining substantially all of the Mobile Refinery’s output of certain refined products and will own such refined products while they are located within certain specified locations at the Mobile Refinery. Macquarie will have title to and risk of loss of crude oil and refined products purchased from Vertex Refining while within certain specified locations at the Mobile Refinery and a specified third party storage terminal.
Pursuant to the Supply and Offtake Agreement and subject to the terms and conditions therein, Macquarie may during the term of the Supply and Offtake Agreement procure crude oil and refined products from certain third parties which may be sold to Vertex Refining or third parties pursuant to the Supply and Offtake Agreement and may sell Refined Products to Vertex Refining or third parties (including customers of Vertex Refining).
The obligations of Vertex Refining and any of its subsidiaries under the Supply and Offtake Agreement and related transaction documents are guaranteed by the Company. The obligations of Vertex Refining and any of its subsidiaries under the Supply and Offtake Agreement and related transaction documents are also secured by a Pledge and Security Agreement in favor of Macquarie, discussed below, executed by Vertex Refining. In addition, the Supply and Offtake Agreement also requires that Vertex Refining post and maintain cash collateral (in the form of an independent amount) as security for Vertex Refining’s obligations under the Supply and Offtake Agreement and the related transaction documents. The amount of cash collateral is subject to adjustments during the term.
Pursuant to the Supply and Offtake Agreement, Vertex Refining and Macquarie agreed to cooperate to develop and document, by no later than 180 days after the Commencement Date, procedures relating to the unwinding and termination of the agreement and related agreements, in the event of the expiration or early termination of the Supply and Offtake Agreement. The parties also agreed to use commercially reasonable efforts to negotiate mutually agreeable terms for Macquarie’s intermediating of renewable feedstocks and renewable diesel that will be utilized and/or produced by Vertex Refining in connection with and following a planned renewable diesel conversion project at the Mobile Refinery (including providing Macquarie a right of first refusal in connection therewith), for 90 days after the Commencement Date (the “RD Period”)., which discussions are ongoing. If, by the end of the RD Period, Macquarie and Vertex Refining, each acting in good faith and in a commercially reasonable manner, have not been able to reach commercial agreement regarding the entry into a renewable diesel intermediation, Vertex Refining may elect to terminate the Supply and Offtake Agreement by providing notice of any such election to Macquarie; provided that no such election may be effective earlier than the date falling 90 calendar days following the date on which such notice is delivered. The agreement is also subject to termination upon the occurrence of certain events, including the termination of certain agreements relating to the delivery of crude oil to and the offtake of products from the Mobile Refinery. Upon an early termination of the Supply and Offtake Agreement, Vertex Refining is required to pay certain amounts relating to such termination to Macquarie including, among other things, outstanding unpaid amounts, amounts owing with respect to terminating transactions under the Supply and Offtake Agreement and related transaction documents, unpaid ancillary costs, and breakage costs, losses and out-of-pocket costs with respect to the termination, liquidation, maintenance or reestablishment, or redeployment of certain hedges put in place by Macquarie in connection with the transactions contemplated by the agreement, and Vertex Refining is required to pay other termination fees and amounts to Macquarie in the event of any termination of the agreement. Additionally, upon the termination of the Supply and Offtake Agreement, the outstanding obligations of Vertex Refining and Macquarie to each other will be calculated and reduced to an estimated net settlement payment which will be subject to true-up when the final settlement payment has been calculated following termination.
The Supply and Offtake Agreement requires Vertex Refining to prepare and deliver certain forecasts, projections and estimates and comply with financial statement delivery obligations and other disclosure obligations. The agreement also requires Vertex Refining to provide Macquarie notice of certain estimated monthly crude oil delivery, crude oil consumption, product production, target inventory levels and product offtake terms, which Macquarie has the right to reject, subject to certain disclosure requirements.
The Supply and Offtake Agreement has a 24 month term following the Commencement Date, subject to the performance of customary covenants, and certain events of default and termination events provided therein (certain of which are discussed in greater detail below), for a facility of this size and type. Additionally, either party may terminate the agreement at any time, for any reason, with no less than 180 days prior notice to the other.
The Supply and Offtake Agreement includes certain customary representations, warranties, indemnification obligations and limitations of liability of the parties for a facility of this size and type, and also requires Vertex Refining to be responsible for certain ancillary costs relating to the Supply and Offtake Agreement and the transactions contemplated thereby. The Supply and Offtake Agreement requires Vertex Refining to comply with various indemnity, insurance and tax obligations, and also includes a prohibition on any amendments to Vertex Refining’s financing agreements which, among other things, adversely affect Macquarie’s rights and remedies under the Supply and Offtake Agreement and related transaction documents without the prior consent of Macquarie; a prohibition on Vertex Refining entering into any financing agreement which would cause Vertex Refining’s specified indebtedness to exceed $10 million without Macquarie’s prior consent, subject to certain exceptions; and a requirement that Vertex Refining not have less than $17.5 million in unrestricted cash for any period of more than three consecutive business days. The Supply and Offtake Agreement includes events of default and termination events, including if the Company ceases to beneficially own, directly or indirectly, 100% of the capital stock of Vertex Refining; the change in ownership of the Company or Vertex Refining resulting in one person or group acquiring 50% or more of the capital stock of the Company or Vertex Refining (as applicable); or a change in a majority of the Board of Directors of the Company or Vertex Refining during any 12 consecutive months, without certain approvals, including the approval of the Board of Directors of the Company or Vertex Refining (as applicable) immediately prior to such change; and a cross default to indebtedness (other than indebtedness under financing agreements) of the Company or Vertex Refining for over $20 million, a cross default to indebtedness under financing agreements of Vertex Refining or the Company, or a final judgment or order being rendered against Vertex Refining or the Company in an amount exceeding $20 million.
The price for crude oil purchased by the Company from Macquarie and for products sold by the Company to Macquarie within each agreed product group, in each case, is equal to a pre-determined benchmark, plus a pre-agreed upon differential, subject to adjustments and monthly true-ups.
Vertex Refining will be required to pay Macquarie various monthly fees in connection with the Supply and Offtake Agreement and related arrangements, including, without limitation, (1) an inventory management fee, calculated based on the value of the inventory owned by Macquarie in connection with the Supply and Offtake Agreement, (2) a lien inventory fee based upon the value of certain inventory on which Macquarie has a lien, (3) a per barrel crude handling fee based upon the volume of crude oil Macquarie sells to Vertex Refining, (4) per barrel crude oil and products intermediation fees for each barrel of crude oil which Macquarie buys from a third party and each barrel of products Macquarie sells to a third party, in each case, in connection with the Supply and Offtake Agreement, and (5) a services fee in respect of which Macquarie agrees to make Crude Oil and Products available to the Company in accordance with the weekly nomination procedure as set forth in the Supply and Offtake Agreement. Vertex Refining will also be responsible for certain payments relating to Macquarie’s hedging of the inventory it owns in connection with the Supply and Offtake Agreement, including the costs of rolling hedges forward each month, as well as any costs (or gains) resulting from a mismatch between the Company’s projected target inventory levels (which provide the basis for Macquarie’s hedge position) and actual month end inventory levels.
In connection with the entry into the Supply and Offtake Agreement, Vertex Refining entered into various ancillary agreements which relate to supply, storage, marketing and sales of crude oil and refined products including, but not limited to the following: Inventory Sales Agreement, Master Crude Oil and Products Agreement, Storage and Services Agreement, and a Pledge and Security Agreement (collectively with the Supply and Offtake Agreement, the “Supply Transaction Documents”). The Company agreed to guarantee the obligations of Vertex Refining and any of its subsidiaries arising under the Supply Transaction Documents pursuant to the entry into a Guaranty in favor of Macquarie.
Tripartite Agreements
Also on the Commencement Date, Vertex Refining, Macquarie and certain parties subject to crude oil supply and products offtake agreements with Vertex Refining, relating to the Mobile Refinery, entered into various tripartite agreements (the “Tripartite Agreements”), whereby Vertex Refining granted Macquarie the right, on a rolling daily or monthly basis, as applicable, to elect to assume Vertex Refining’s rights and obligations under such crude oil supply and products offtake agreements in connection with the performance of the Supply and Offtake Agreement, and the counterparties thereto are deemed to have consented to Macquarie’sMacquarie assuming such obligations. Such Tripartite Agreements also provided for certain interpretations of the provisions of such supply and offtake agreements between Vertex Refining and such third parties in connection with Macquarie’s right to elect to assume Vertex Refining’s rights and obligations under such agreements. The Tripartite Agreements remain in place until the termination of the agreements to which they relate, or the earlier termination thereof as set forth in the Tripartite Agreements, including in the event of certain events of default by the parties thereto under the modified crude oil supply and products offtake agreements or the Supply and Offtake Agreement and related transaction documents and also in the event of the termination of the Supply and Offtake Agreement. Macquarie, Vertex Refining and a third party offtaker also entered into a tripartite agreement pursuant to which certain storage capacity within the Mobile Refinery which Macquarie had leased pursuant to the Storage and Services Agreement was effectively made available to such
third party consistent with the terms agreed by such party and Vertex Refining in its underlying products offtake agreement. Macquarie, Vertex Refining and a third party storage terminal operator also entered into a tripartite agreement relating to the storage of Macquarie-owned crude oil in such terminal in connection with the Supply and Offtake Agreement.
Guaranty
Vertex Refining’s obligations under the Supply and Offtake Agreement and related transaction documents (other than the hedges which are secured and guaranteed on a pari passu basis under the Loan and Security Agreement) were unconditionally guaranteed by the Company pursuant to the terms of a Guaranty entered into on April 1, 2022, by the Company in favor of Macquarie (the “Guaranty”).
Pledge and Security Agreement
In connection with the entry into the Supply and Offtake Agreement, Vertex Refining entered into a Pledge and Security Agreement in favor of Macquarie, pursuant to which it provided Macquarie a first priority security interest in all inventory, including all crude oil, product, and all proceeds with respect of the forgoing, subject to certain exceptions. The Pledge and Security Agreement includes customary representations, warranties and covenants of Vertex Refining for a facility of this size and type.
Inventory Sales Agreement
On April 1, 2022, pursuant to an Inventory Sales Agreement entered into between Vertex Refining and Macquarie, Macquarie purchased all crude oil and finished products (including, jet fuel, diesel and gasoline) located at the Mobile Refinery and held in inventory on such date, which purchase was based on agreed upon market values (the “Mobile Refinery Inventory”) from Vertex Refining for $154 million (which funds, together with cash on hand, were used by Vertex Refining to purchase the Mobile Refinery Inventory from Shell, as discussed in detail above), which Mobile Refinery Inventory then became subject to the terms of the Supply and Offtake Agreement.
Initial Warrant Agreement and Registration Rights Agreement
In connection with the entry into the Loan and Security Agreement, and as a required term and condition thereof, on April 1, 2022, the Company granted warrants (the ““Initial Warrants”) to purchase 2,750,0002.75 million shares of the Company’s common stock to the Lenders and their assigns. The terms of the Initial Warrants are set forth in a Warrant Agreement entered into on April 1, 2022, between the Company and Continental Stock Transfer & Trust Company as warrant agent (the ““Initial Warrant Agreement”).
The Initial Warrants have a five-year term and a $4.50 per share exercise price, and include weighted average anti-dilutive rights in the event any shares of common stock or other equity or equity equivalent securities payable in common stock are granted, issued or sold (or the Company enters into any agreement to grant, issue or sell), or in accordance with the terms of the Warrant Agreement, are deemed to have granted, issued or sold, in each case, at a price less than the exercise price, which automatically decreases the exercise price of the Initial Warrants upon the occurrence of such event, as described in greater detail in the Warrant Agreement, and increases the number of shares of common stock issuable upon exercise of the Initial Warrants, such that the aggregate exercise price of all Initial Warrants remains the same before and after any such dilutive event. Until or unless the Company receives shareholder approval under applicable Nasdaq listing rules for the issuance of more than 19.9% of the Company’s outstanding shares of common stock on the date the Warrant Agreement was entered into (i.e., 12,828,681 shares of common stock, based on 64,465,734 shares of outstanding common stock on such date)(the “Share Cap”), the Company may not issue more shares of common stock upon exercise of theThe Initial Warrants than totals the Share Cap, and is required to pay the Lenders cash, based on the fair market value of any shares required to be issued upon exercise of the Warrants (as calculated in the Warrant Agreement), which would exceed the Share Cap. Upon the occurrence of a fundamental transaction (asare described in the Warrant Agreement) the Warrantgreater detail below under “Amendment Number One to Loan and Security Agreement (a) provides each holder a put right and (b) provides the Company with a call right in respect of the Warrants. Upon the exercise of a put right by the holder or a call right by the Company, the Company is obligated to repurchase the Warrants for the Black Scholes Value of the Warrants repurchased, as calculated in the Warrant Agreement. The Warrants also include cashless exercise rights and a provision preventing a holder of the Warrants from exercising any portion of their Warrants if such holder (together with its affiliates) would beneficially own in excess of 4.99% or 9.99% (as applicable pursuant to the Warrant Agreement) of the number of shares of Company common stock outstanding immediately after giving effect to the exercise, subject to certain rights of the holders to increase or decrease such percentage.”.
In connection with the grant of the Initial Warrants, the Company and the holders of such Warrants entered into a Registration Rights Agreement dated April 1, 2022 (the ““Initial Registration Rights Agreement”). Under, which was amended and replaced by the Amended and Restated Registration Rights Agreement the Company agreed to file a registration statement (the “Initial Registration Statement”) with the Securities and
Exchange Commission (the “SEC” or the “Commission”) as soon as reasonably practicable anddiscussed in no event later than 75 days following April 1, 2022, for purposes of registering the resale of the shares of common stock issuable upon exercise of the Warrants. The Company also agreed to use commercially reasonable efforts to cause the SEC to declare the Registration Statement effective as soon as practicable and no later than 45 days following the filing of the Initial Registration Statement; provided, that such date is extended until 120 days after the filing date if the Initial Registration Statement is reviewed by the staff of the Commission. The Registration Rights Agreement also provides the holders of the Warrants certain piggyback and demand registration rights (including pursuant to an underwritten offering, in the event the gross proceeds from such underwritten offering are expected to exceed $35 million).greater detail below.
If, subject to certain limited exceptions described in the Registration Rights Agreement, (i) the Initial Registration Statement required to be filed pursuant to the Registration Rights Agreement is not filed on or prior to the required filing deadline (or without complying with the terms of the Registration Rights Agreement), (ii) a registration statement registering for resale all of the registrable securities is not declared effective by the Commission by the required effectiveness deadline, or (iii) during the period commencing on the effective date of the Initial Registration Statement and ending on the earlier of the date when there are no registrable securities or the third anniversary of the effective date of the Initial Registration Statement, a registration statement is not continuously effective to allow the sale of the shares underlying the Warrants, for more than 10 consecutive calendar days or more than an aggregate of 15 calendar days (which need not be consecutive) during any 12-month period, then, in addition to any other rights such holder of Warrants may have under the Registration Rights Agreement or applicable law, (x) on the first such applicable default date, the Company shall pay to such holder of a Warrant an amount in cash, as partial liquidated damages and not as a penalty, equal to 1.0% of the fair market value (such fair market value calculated as required under the Registration Rights Agreement) of the registrable securities held by such holder (the “1% Penalty”), and (y) on each monthly anniversary of such default date until all applicable defaults have been cured, shall pay the 1% Penalty, subject to a maximum penalty of 10% of the fair market value of the registrable securities held by each applicable holder of Warrants, (such fair market value calculated as required under the Registration Rights Agreement).
The Company has agreed, among other things, to indemnify the holders of the Warrants and their affiliates with respect to certain liabilities and to pay all fees and expenses incident to the Company’s obligations under the Registration Rights Agreement.
Crude Supply Agreement
On the Commencement Date, Vertex Refining and Shell Trading (US) Company (“STUSCO”) entered into a Crude Oil & Hydrocarbon Feedstock Supply Agreement (the “Crude Supply Agreement”) pursuant to which STUSCO agreed to sell to Vertex Refining, and Vertex Refining agreed to buy from STUSCO, all of the crude oil and hydrocarbon feedstock requirements of the Mobile Refinery, subject to certain exceptions set forth therein. The agreement provides that STUSCO is the exclusive supplier for the Mobile Refinery’s requirement for crude oil and hydrocarbon feedstock.
The initial term of the Crude Supply Agreement will continue for five (5) years beginning on the Commencement Date, unless earlier terminated, and will automatically renew for one (1) year renewal terms thereafter subject to timely notice of either party that it elects not to so renew.
Pursuant to the Crude Supply Agreement, STUSCO will procure crude oil based upon a monthly mandate from Vertex Refining as to the Mobile Refinery’s requirements for each delivery month, based on a pre-agreed price, based on internal market prices, subject in certain cases to markup.
Vertex Refining will prepay STUSCO for crude oil deliveries on a provisional basis during a predetermined delivery period during each delivery month, subject to final true up.
The Crude Supply Agreement also contains customary and typical general terms and conditions for transactions of this nature.
Pursuant to a tripartite agreement, Macquarie may intermediate Vertex Refining’s purchases of crude oil from STUSCO under the Crude Supply Agreement, from time to time, by assuming Vertex Refining’s rights and obligations under the Crude Supply Agreement in respect of purchases of crude oil and feedstock in a given delivery month. If Macquarie assumes Vertex Refining’s rights and obligations, Macquarie will be responsible for paying the purchase price for such crude oil and feedstocks to STUSCO in accordance with the terms of the tripartite agreement. In the event that Macquarie intermediates a purchase and sale, the terms and conditions for Vertex Refining’s payments to Macquarie for such crude oil and feedstocks will be determined pursuant to the Supply and Offtake Agreement.
Storage & Services Agreement
On the Commencement Date, Vertex Refining and Macquarie entered into a Storage & Services Agreement (the “Storage & Services Agreement”), whereby Vertex Refining granted Macquarie certain access, storage, usage and information rights in respect of the Mobile Refinery and certain storage facilities and agreed to provide Macquarie certain services in connection with, among other things, such rights under certain other agreements, including the Supply and Offtake Agreement and various tripartite agreements.
Pursuant to the Storage & Services Agreement, Macquarie will pay Vertex Refining a monthly storage fee for provision of the storage and related services.
Pursuant to the Storage & Services Agreement, Macquarie will have the exclusive and uninterrupted license and right to use certain storage facilities specified in the Supply and Offtake Agreement (the “Included Locations”), including the right to inject, store and withdraw crude oil and products (as applicable) in and from the Included Locations. Vertex Refining will be responsible for the care, custody and control of, and will hold as bailee, the property of Macquarie and certain other eligible
hydrocarbons which are held within the Included Locations, and will be solely responsible for pumping, unloading, receipt, movements, blending, transportation, storage, measuring, gauging, sampling, analysis, treatment, refining, loading, and delivery of and use of such property, subject to the terms of the Supply and Offtake Agreement and other applicable transaction documents.
Pursuant to the Storage & Services Agreement and in addition to customary services provided by a storage provider, Macquarie has appointed Vertex Refining to perform certain obligations assumed by Macquarie in connection with supply, offtake and exchange arrangements related to the Supply and Offtake Agreement and related transaction documents, including, without limitation, giving, receiving, accepting and rejecting nominations for delivering, loading, unloading, receiving and transporting crude oil and products; the provision of facilities for the delivery, loading, unloading and transportation of crude oil and products; arranging, coordinating quantity and quality sampling, measurements, analysis and inspections for crude oil and products; preparing and handling shipping documentation; providing information with respect to, and submitting claims in relation to, quality, quantity and demurrage; and notifying Macquarie of the occurrence of certain specified events. Vertex Refining periodically will be required to provide various reports to Macquarie regarding the inventory held in the Included Locations.
The Storage & Services Agreement includes certain accelerated export rights pursuant to which, upon the occurrence of certain events, including during the continuation of an event of default under the Supply and Offtake Agreement, Macquarie can instruct Vertex Refining to withdraw all or any amount of Macquarie’s property from the Included Locations.
Macquarie has certain rights to inspect and access the Included Locations and conduct audits on accounting records and other documents maintained by Vertex Refining relating to the Storage & Services Agreement, in each case subject to the terms and conditions of the Storage & Services Agreement.
Vertex Refining will be required to maintain and operate the Included Locations in accordance with various customary covenants contained within the Storage & Services Agreement, including, without limitation, in respect of the maintenance of the Included Locations and related facilities, the standard of care pursuant to which Vertex Refining will perform services under the Storage & Services Agreement, insurance requirements, and compliance with laws. Vertex Refining made various representations and warranties to Macquarie which are required to continue to be met during the term of the agreement, which are customary and typical for storage agreements relating to an intermediation facility, including maintaining insurance. The Supply & Storage Agreement also includes certain customary limitations on liability and damages.
In addition to certain obligations to indemnify Macquarie for loss, damage or degradation of Macquarie’s property held at the Included Locations, Vertex Refining agreed to indemnify Macquarie against various liabilities which may arise relating to its performance under the Storage & Services Agreement, as well as, among other liabilities, any liabilities directly or indirectly arising from or in connection with environmental conditions at the facility, environmental law, required permits, and law applicable to the operation of Vertex Refining’s refinery and storage facilities.
The term of the Storage & Services Agreement will continue until the earlier to occur of (i) the date upon which all of Macquarie’s property in the Included Locations has been sold to Vertex Refining or another person or (ii) the date upon which Macquarie has certified that all of its property has been removed from the Included Locations.
ULSD/Gasoline Offtake Agreement
On the Commencement Date, Vertex Refining and Equilon Enterprises LLC, dba Shell Oil Products US (“Shell”) entered into a refined products offtake agreement for the sale of ultra low sulfur diesel (“ULSD”) and gasoline (the “ULSD/Gasoline Offtake Agreement”) pursuant to which Shell agreed to purchase from Vertex Refining, and Vertex Refining agreed to sell to Shell, ULSD and gasoline produced by the Mobile Refinery according to an agreed nomination and confirmation process, subject to certain exceptions set forth therein.
The initial term of the ULSD/Gasoline Offtake Agreement will continue for five years beginning on the Commencement Date, unless earlier terminated as provided in the ULSD/Gasoline Offtake Agreement, and will automatically renew for one year renewal terms thereafter, unless terminated by either party by written notice as set forth therein.
With respect to purchases and sales of ULSD, during the first three years of the term, Shell is required to purchase and Vertex Refining is required to sell certain pre-determined amounts of barrels (subject to minimums and maximums) per month. Thereafter, Vertex Refining may elect to sell Shell the same amounts or certain other pre-determined amounts, at Shell’s option. Volumes in excess of the foregoing limits for ULSD may be sold subject to mutual agreement.
With respect to purchases and sales of gasoline, during the first three years of the term, Shell will purchase all gasoline produced at the refinery up to certain maximum number of barrels per day, and all premium gasoline up to a pre-determined maximum number of barrels per day. Thereafter, Vertex Refining may elect to sell Shell the same amounts or certain pre-determined amounts of barrels (subject to minimums and maximums) per month, at Shell’s option. Volumes in excess of the foregoing limits for gasoline may be sold subject to mutual agreement.
In the event that Shell does not purchase and take delivery of certain required quantities of product nominated for purchase in a given month, Vertex Refining is entitled to sell the resulting shortfall volumes and obtain cover damages from Shell (excluding shortfall volumes resulting from force majeure events). In the event that Vertex Refining does not supply certain required quantities of product nominated for sale in a given month, Shell is entitled to procure replacement product to cover the shortfall volumes and obtain damages from Vertex Refining (excluding shortfall volumes resulting from force majeure events) in connection therewith.
Products will be provisionally priced and invoiced over certain pre-determined periods, subject to final true up. Prices will be calculated based upon published indices and an agreed fixed per gallon differentials.
The ULSD/Gasoline Offtake Agreement also contains customary and typical general terms and conditions for transactions of this nature.
Amendment Number One to Loan and Security Agreement
On May 26, 2022, each of the Initial Guarantors (including the Company), Vertex Refining OH, LLC, an Ohio limited liability company (“Vertex Ohio”), HPRM, and Tensile-Heartland, and together with Vertex Ohio and HPRM, the “Additional Guarantors”, and the Additional Guarantors, together with the Initial Guarantors, the “Guarantors”, and the Guarantors, together with Vertex Refining, the “Loan Parties”), entered into an Amendment Number One to Loan and Security Agreement (“Amendment No. One to Loan Agreement”), with certain of the Lenders and CrowdOut Warehouse LLC, as a lender (the “Additional Lenders” and together with the Initial Lenders, the “Lenders”) and the Agent, pursuant to which, the amount of the Term Loan (as defined below) was increased from $125 million to $165 million, with the Additional Lenders providing an additional term loan in the amount of $40 million (the “Additional Term Loan”, and together with the Initial Term Loan, the “Term Loan”).
As part of the transaction, each of the Additional Guarantors entered into joinders to the prior intercreditor agreement, intercompany subordination agreement, and collateral and pledge agreements relating to the Term Loan, and certain of the prior mortgages securing the Term Loan were amended to provide the Additional Lenders secured rights over the amount of the Additional Term Loan.
The Amendment No. One to Loan Agreement amended the Loan and Security Agreement to provide for the Additional Term Loan; to provide for the grant of the Additional Warrants (defined and described below) to the Lenders; and to include certain other mutually negotiated changes to the Loan and Security Agreement, including permitting certain share buybacks.
The proceeds of the Additional Term Loan can be used by the Company to fund (i) the acquisition of Heartland SPV pursuant to the Heartland Purchase Agreement and (ii) certain fees and expenses associated with the closing of the transactions contemplated by the Heartland Purchase Agreement and the Additional Term Loan.
The Term Loan will bear interest at a rate per annum equal to the sum of (i) the greater of (x) the per annum rate publicly quoted from time to time by The Wall Street Journal as the “Prime Rate” in the United States minus 1.50% as in effect on such day and (y) the Federal Funds rate for such day plus 0.50%, subject in the case of this clause (i), to a floor of 1.0%, plus (ii) 9.25%. The funds borrowed in connection with the Term Loan were issued with an original issue discount of 1.5%. The Company also paid certain fees and transaction expenses in connection with the Term Loan. Amounts owed under the Loan and Security Agreement (as amended), if not earlier repaid, are due on April 1, 2025 (or the next business day thereafter). Interest on the Term Loans is payable in cash (i) quarterly, in arrears, on the last business day of each calendar quarter, commencing on the last business day of the calendar quarter ending June 30, 2022, (ii) in connection with any payment, prepayment or repayment of the Term Loans (including as discussed in greater detail below), and (iii) at maturity (whether upon demand, by acceleration or otherwise).
Pursuant to the Loan and Security Agreement (as amended), on the last day of March, June, September and December of each year (or if such day is not a business day, the next succeeding business day), beginning on March 31, 2023 and ending on December 31, 2024, Vertex Refining is required to repay $2,062,500 of the principal amount owed under the Loan and
Security Agreement (as amended) (i.e., 1.25% of the principal amount per quarter), subject to reductions in the event of any prepayment of the Loan and Security Agreement (as amended).
In connection with the Additional Term Loan, and as additional consideration to the Additional Lenders for loaning funds to the Company in connection therewith, the Company granted warrants to purchase 250,000 shares of common stock of the Company to the Lenders (and/or their affiliates), as discussed in greater detail below.
Additional Warrant Agreement and Amended and Restated Registration Rights Agreement
In connection with the entry into the Amendment No. One to Loan Agreement, and as a required term and condition thereof, on May 26, 2022, the Company granted warrants (the “Additional Warrants” and together with the Initial Warrants, the “Warrants”) to purchase 250,000 shares of the Company’s common stock to the Lenders and their affiliates. The terms of the Additional Warrants are set forth in a Warrant Agreement (the “Additional Warrant Agreement” and together with the Initial Warrant Agreement, the “Warrant Agreements”) entered into on May 26, 2022, between the Company and Continental Stock Transfer & Trust Company as warrant agent.
In connection with the grant of the Additional Warrants, the Company and the holders of the Warrants entered into an Amended and Restated Registration Rights Agreement dated May 26, 2022, entered into between the Company and the holders of the Warrants (as amended and restated, the “Amended and Restated Registration Rights Agreement” or the “Registration Rights Agreement”). Under the Registration Rights Agreement, the Company agreed to file a registration statement (the “Initial Registration Statement”) with the SEC as soon as reasonably practicable and in no event later than 75 days following April 1, 2022 (i.e., on or before June 15, 2022), for purposes of registering the resale of the shares of common stock issuable upon exercise of the Warrants. The Company also agreed to use commercially reasonable efforts to cause the SEC to declare the Registration Statement effective as soon as practicable and no later than 45 days following the filing of the Initial Registration Statement; provided, that such date is extended until 120 days after the filing date if the Initial Registration Statement is reviewed by the staff of the Commission. The Registration Rights Agreement also provides the holders of the Warrants certain piggyback and demand registration rights (including pursuant to an underwritten offering, in the event the gross proceeds from such underwritten offering are expected to exceed $35 million). The Company filed and obtained effectiveness of the required Registration Statement on July 8, 2022.
The Additional Warrants have a five and one-half-year term and a $9.25 per share exercise price, and include weighted average anti-dilutive rights in the event any shares of common stock or other equity or equity equivalent securities payable in common stock are granted, issued or sold (or the Company enters into any agreement to grant, issue or sell), or in accordance with the terms of the Additional Warrant Agreement, are deemed to have granted, issued or sold, subject to certain exceptions, in each case, at a price less than the exercise price, which automatically decreases the exercise price of the Additional Warrants upon the occurrence of such event, as described in greater detail in the Additional Warrant Agreement, and increases the number of shares of common stock issuable upon exercise of the Additional Warrants, such that the aggregate exercise price of all Additional Warrants remains the same before and after any such dilutive event.
Until or unless the Company receives shareholder approval under applicable Nasdaq listing rules for the issuance of more than 19.9% of the Company’s outstanding shares of common stock on April 1, 2022, pursuant to the exercise of Warrants (i.e., 12,828,681 shares of common stock, based on 64,465,734 shares of outstanding common stock on such date) (the “Share Cap”), the Company may not issue more shares of common stock upon exercise of the Warrants than the Share Cap, and is required to pay the Lenders cash, based on the fair market value of any shares required to be issued upon exercise of the Prior Warrants and Additional Warrants (as calculated in the Warrant Agreement), in excess of the Share Cap. Upon the occurrence of a fundamental transaction (as described in the Warrant Agreements), the Warrant Agreements (a) provide each holder a put right and (b) provides the Company with a call right in respect of the Warrants. Upon the exercise of a put right by the holder or a call right by the Company, the Company is obligated to repurchase the Warrants for the Black Scholes Value of the Warrants repurchased, as calculated in the Warrant Agreements. The Warrants also include cashless exercise rights and a provision preventing a holder of the Warrants from exercising any portion of their Warrants if such holder (together with its affiliates) would beneficially own in excess of 4.99% or 9.99% (as applicable pursuant to the Warrant Agreements) of the number of shares of Company common stock outstanding immediately after giving effect to the exercise, subject to certain rights of the holders to increase or decrease such percentage.
Amendment No. 1 to the First Amended and Restated Registration Rights Agreement
On June 15, 2022, the Company and the holders of the Warrants (the “Warrant Holders”) entered into an Amendment No. 1 to the First Amended and Restated Registration Rights Agreement (the “Amendment”), which amended the required filing date of the initial registration statement that the Company is required to use commercially reasonable efforts to file
pursuant to the terms of the Registration Rights Agreement, to register the resale of the shares of common stock underlying the Warrants, from no later than June 15, 2022, to on July 1, 2022, or, if the Company was then ineligible to file a registration statement on such date, to require the Company to use commercially reasonable efforts to cause such registration statement to be declared effective under the Securities Act, as promptly as reasonably practicable after the initial filing thereof (including, if then a “well-known seasoned issuer” (as defined in Rule 405 of the Securities Act, a “WKSI”) by filing such registration statement as an automatically effective shelf registration statement). The Amendment also included various representations from the Company regarding its satisfaction of the requirements for being a WKSI.
RESULTS OF OPERATIONS
Description of Material Financial Line Items:
Revenues
During the periods covered by this Report, we generated revenues from three existing operating segments as follows:
BLACK OIL -Revenues from our Black Oil segment are comprised primarily of product sales from our re-refineries and feedstock sales (used motor oil) which are purchased from generators of used motor oil such as oil change shops and garages, as well as a network of local and regional suppliers. Volumes are consolidated for efficient delivery and then sold to third-party re-refiners and fuel oil blenders for the export market. In addition, through used oil re-refining, we re-refine used oil into different commodity products. Through the operations at our Marrero, Louisiana facility, we produce a Vacuum Gas Oil (VGO) product from used oil re-refining which is then sold via barge to crude refineries to be utilized as an intermediate feedstock in the refining process. Through the operations at our Columbus, Ohio facility, we produce a base oil finished product which is then sold via truck or rail car to end users for blending, packaging and marketing of lubricants.
Discontinued operations of Vertex include the Black Oil Segment, also referred to as the “UMO Business”, Refer to Note 15,16, "Discontinued Operations" in the Notes to Financial Statements for additional information. REFINING AND MARKETING -The Refining and Marketing segment generates revenues relating to the sales of finished products. The Mobile Refinery and Logistics Assets are included in our Refining and Marketing segment and are a group of downstream assets and related logistics infrastructure of the Mobile Truck Rack.The Mobile Refinery currently processes heavy and sour crude to produce heavy olefin feed, regular gasoline, premium gasoline, jet fuel and diesel fuel.
This segment also gathers hydrocarbon streams in the form of petroleum distillates, transmix and other chemical products that have become off-specification during the transportation or refining process. These feedstock streams are purchased from pipeline operators, refineries, chemical processing facilities and third-party providers, and then processed at a third-party facility under our direction. The end products are typically three distillate petroleum streams (gasoline blendstock, pygas and fuel oil cutterstock), which are sold to major oil companies or to large petroleum trading and blending companies. The end products are delivered by barge and truck to customers. In addition, we are distributing refined motor fuels such as gasoline, blended gasoline products and diesel used as engine fuels, to third party customers who typically resell these products to retailers and end consumers.
RECOVERY -The Recovery segment is a generator solutions company for the proper recovery and management of hydrocarbon streams. We own and operate a fleet of trucks and other vehicles used for shipping and handling equipment and scrap materials.
Our revenues are affected by changes in various commodity prices including crude oil, natural gas, #6 oil and metals.
The Mobile Refinery and Logistics Assets are a group of downstream assets and related logistics infrastructure of the Mobile Truck Rack. The Mobile Refinery currently processes heavy and sour crude to produce heavy olefin feed, regular gasoline, premium gasoline, jet fuel and diesel fuel.
Cost of Revenues
BLACK OIL -Cost of revenues for our Black Oil segment are comprised primarily of feedstock purchases from a network of providers. Other cost of revenues includeincludes processing costs, transportation costs, purchasing and receiving costs, analytical assessments, brokerage fees and commissions, and surveying and storage costs.
Discontinued operations of Vertex include the Black Oil Segment, also referred to as the UMO Business, Refer to Note 15,16, "Discontinued Operations" in the Notes to Financial Statements for additional information. REFINING AND MARKETING -The Refining and Marketing segment incurs cost of revenues relating to the purchase of feedstock, purchasing and receiving costs, and inspection and processing of the feedstock into gasoline blendstock, pygas and fuel oil cutter by a third party. Cost of revenues also includes broker’s fees, inspection and transportation costs.
RECOVERY -The Recovery segment incurs cost of revenues relating to the purchase of hydrocarbon products, purchasing and receiving costs, inspection, and transporting of metals and other salvage and materials. Cost of revenues also includes broker’s fees, inspection and transportation costs.
Our cost of revenues is affected by changes in various commodity indices, including crude oil, natural gas, #6 oil and metals. For example, if the price for crude oil increases, the cost of solvent additives used in the production of blended oil products, and fuel cost for transportation cost from third party providers will generally increase. Similarly, if the price of crude oil falls, these costs may also decline.
General and Administrative Expenses
Our general and administrative expenses consist primarily of salaries and other employee-related benefits for executive, administrative, legal, financial, and information technology personnel, as well as outsourced and professional services, rent, utilities, and related expenses at our headquarters, as well as certain taxes.
Depreciation and Amortization Expenses
Our depreciation and amortization expenses are primarily related to the property, plant and equipment and intangible assets acquired in connection with our Vertex Holdings, L.P. (formerly Vertex Energy, L.P.), a Texas limited partnership (“Holdings”), Omega Refining, LLC (“Omega Refining”), Warren Ohio Holdings Co., LLC, f/k/a Heartland Group Holdings, LLC (“Heartland”), Acadiana Recovery, LLC, Nickco Recycling, Inc., Ygriega Environmental Services, LLC, Specialty Environmental Services, and Crystal Energy, LLC and Mobile Refinery acquisitions.
Depreciation and amortization expense attributable to cost of revenues reflects the depreciation and amortization of the fixed assets at our refineries along with rolling stock at our collection branches.
Depreciation and amortization expense attributable to operating expenses reflects depreciation and amortization related to our corporate and administrative offices along with systems, applications, and products (SAP) and internet technology (IT) related items and intangibles.
Factors Impacting Comparability of Our Financial Results
Our results of operations for the three and six months ended June 30, 2022, were significantly impacted by the acquisition of the Mobile Refinery on April 1, 2022. There are no comparable amounts presented for the same periods in 2021. See summary of the Mobile Refinery operating results under Results of Operations – Mobile Refinery, below.
Non-GAAP Financial Measures
In addition to our results calculated under generally accepted accounting principles in the United States (“GAAP”), in this Report we also present Refining Gross Margin, Refining Gross Margin Per Barrel of Throughput and Refining Adjusted EBITDA, each as discussed in greater detail below. Refining Gross Margin, Refining Gross Margin Per Barrel of Throughput and Refining Adjusted EBITDA are “non-GAAP financial measures” presented as supplemental measures of the Company’s performance. They are not presented in accordance with GAAP. We use Refining Gross Margin, EBITDA and Adjusted EBITDA as supplements to GAAP measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions, to allocate resources and to compare our performance relative to our peers. Additionally, these measures, when used in conjunction with related GAAP financial measures, provide investors with an additional financial analytical framework which management uses, in addition to historical operating results, as the basis for financial, operational and planning decisions and present measurements that third parties have indicated are useful in assessing the Company and its results of operations. Refining Gross Margin, EBITDA and Adjusted EBITDA are presented because we believe they provide additional useful information to investors due to the various noncash items during the period. Refining Gross Margin, EBITDA, and Adjusted EBITDA are also frequently used by analysts, investors and other interested parties to evaluate companies in our industry.
Refining Gross Margin, Refining Gross Margin Per Barrel of Throughput and Refining Adjusted EBITDA are unaudited, and have limitations as analytical tools, and you should not consider them in isolation, or as a substitute for analysis of our operating results as reported under GAAP. Some of these limitations are: Refining Gross Margin, Refining Gross Margin Per Barrel of Throughput and Refining Adjusted EBITDA do not reflect cash expenditures, or future requirements for capital expenditures, or contractual commitments; Refining Gross Margin, Refining Gross Margin Per Barrel of Throughput and Refining Adjusted EBITDA do not reflect changes in, or cash requirements for, working capital needs; Refining Gross Margin, Refining Gross Margin Per Barrel of Throughput and Refining Adjusted EBITDA do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on debt or cash income tax payments; although depreciation and amortization are noncash charges, the assets being depreciated and amortized will often have to be replaced in the future, Refining Gross Margin, Refining Gross Margin Per Barrel of Throughput and Refining Adjusted EBITDA do not reflect any cash requirements for such replacements; Refining Gross Margin, Refining Gross Margin Per Barrel of Throughput and Refining Adjusted EBITDA, represent only a portion of our total operating results; and other companies in this industry may calculate Refining Gross Margin, Refining
Gross Margin Per Barrel of Throughput and Refining Adjusted EBITDA differently than we do, limiting their usefulness as a comparative measure.
You should not consider Refining Gross Margin, Refining Gross Margin Per Barrel of Throughput and Refining Adjusted EBITDA in isolation, or as substitutes for analysis of the Company’s results as reported under GAAP. The Company’s presentation of these measures should not be construed as an inference that future results will be unaffected by unusual or nonrecurring items. We compensate for these limitations by providing a reconciliation of each of these non-GAAP measures to the most comparable GAAP measure below. We encourage investors and others to review our business, results of operations, and financial information in their entirety, not to rely on any single financial measure, and to view these non-GAAP measures in conjunction with the most directly comparable GAAP financial measure.
Refining gross margin.
Refining gross margin is defined as revenues less the cost of fuel intakes and other fuel costs. It excludes operating expenses and depreciation attributable to cost of revenues and other non-operating items included in costs of revenues.
Refining gross margin per barrel of throughput.
Refining gross margin per throughput barrel is calculated as refining gross margin divided by total throughput barrels for the period presented.
Refining Adjusted EBITDA.
Refining Adjusted EBITDA represents net income (loss) from operations minus depreciation and amortization, , unrealized gains and losses on hedging activities, gain and loss on intermediation agreement, and unusual or non-recurring charges included in selling, general, and administrative expenses.
Crack Spread USGC 2-1-1
The crack spread is a measure of the difference between market prices for refined products and crude oil, commonly used by the refining industry. We use crack spreads as a performance benchmark for our refining gross margin and as a comparison with other industry participants. Crack spreads can fluctuate significantly, particularly when prices of refined products do not move in the same direction as the cost of crude oil. To calculate the crack spread we believe more closely relates to the crude intakes and products at the Mobile Refinery, we use two barrels of Louisiana Light Sweet crude oiil, producing one barrel of USGC CBOB gasoline and one barrel of USGC ULSD.
The following table reconciles gross profit to refining gross margin and net loss to refining Adjusted EBITDA for the periods presented (in thousands):
| | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2022 |
| | Total Refining and Marketing | | Mobile Refinery |
Gross profit | | $ | 3,614 | | | $ | 1,967 | |
Operating expenses included in cost of revenues | | 17,575 | | | 17,575 | |
Depreciation and amortization attributable to cost of revenues | | 3,009 | | | 2,986 | |
Unrealized loss on hedging activities | | 46,901 | | | 46,901 | |
Loss on inventory intermediation agreement | | 23,180 | | | 23,180 | |
Refining gross margin | | $ | 94,279 | | | $ | 92,609 | |
| | | | |
Net loss from operations | | $ | (20,719) | | | $ | (20,729) | |
Depreciation and amortization | | 3,745 | | | 3,722 | |
Unrealized loss on hedging activities | | 46,901 | | | 46,901 | |
Loss on intermediation agreement | | 23,180 | | | 23,180 | |
Acquisition costs | | 9,078 | | | 9,078 | |
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Environmental reserve | | 1,428 | | | 1,428 | |
Refining Adjusted EBITDA | | $ | 63,613 | | | $ | 63,580 | |
Mobile Refinery
Set forth are our results of operations and certain key performance indicators disaggregated to show only the Mobile Refinery to facilitate comparability between periods (in thousands) and certain key performance indicators:
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| | Three Months Ended June 30, 2022 |
Statement of operations data: | | |
Revenues | | $ | 922,196 | |
Cost of revenues | | 917,243 | |
Depreciation and amortization attributable to cost of revenues | | 2,986 | |
Gross profit | | 1,967 |
Operating expenses: | | |
Operating expenses | | 21,960 |
Depreciation and amortization | | 736 |
Total operating expenses | | 22,696 |
Operating income (loss) | | (20,729) |
Other income (expense) | | |
Interest expense | | (3,250) |
Other income, net | | 18 |
Net loss | | $ | (23,961) | |
Adjusted EBITDA | | $ | 63,580 | |
Key performance indicators: | | |
Sales volume (MBLs) | | 6,468 | |
Refining gross margin | | $ | 92,608 | |
Refining gross margin per bbl of throughput | | 14.11 | |
USGC 2-1-1 Crack Spread Per Barrel | | 45.06 | |
Operating expenses per bbl of throughput | | $ | 3.35 | |
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| | Three Months Ended June 30, 2022 |
Refinery Feedstocks (bpd) | | |
Crude oil | | 72,133 |
Total feedstocks | | 72,133 |
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Refinery Yields (bpd) | | |
| | | | | | | | |
Gasolines | | 17,997 |
Distillates | | 30,112 | |
Other (1) | | 23,646 | |
Total average barrel yields per day | | 71,755 |
(1) Other includes intermediates and LPGs.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31,JUNE 30, 2022 COMPARED TO THE THREE MONTHS ENDED MARCH 31,JUNE 30, 2021 FROM CONTINUING OPERATIONS
Set forth below are our results of operations for the three months ended March 31,June 30, 2022 as compared to the same period in 2021.2021 (in thousands):
| | | Three Months Ended March 31, | | $ Change - Favorable (Unfavorable) | | % Change - Favorable (Unfavorable) | | Three Months Ended June 30, | | $ Change - Favorable (Unfavorable) | | % Change - Favorable (Unfavorable) |
| | 2022 | | 2021 | | 2022 | | 2021 |
Revenues | Revenues | $ | 40,216,796 | | | $ | 25,045,243 | | | $ | 15,171,553 | | | 61 | % | Revenues | $ | 991,839 | | | $ | 30,228 | | | $ | 961,611 | | | 3,181 | % |
Cost of revenues (exclusive of depreciation and amortization shown separately below) | Cost of revenues (exclusive of depreciation and amortization shown separately below) | 38,565,484 | | | 22,808,703 | | | (15,756,781) | | | (69) | % | Cost of revenues (exclusive of depreciation and amortization shown separately below) | 984,442 | | | 28,041 | | | (956,401) | | | (3,411) | % |
Depreciation and amortization attributable to costs of revenues | Depreciation and amortization attributable to costs of revenues | 114,053 | | | 112,497 | | | (1,556) | | | (1) | % | Depreciation and amortization attributable to costs of revenues | 3,122 | | | 116 | | | (3,006) | | | (2,591) | % |
Gross profit | Gross profit | 1,537,259 | | | 2,124,043 | | | (586,784) | | | (28) | % | Gross profit | 4,275 | | | 2,071 | | | 2,204 | | | 106 | % |
| | Operating expenses: | Operating expenses: | | Operating expenses: | |
Selling, general and administrative expenses | Selling, general and administrative expenses | 8,782,395 | | | 2,858,062 | | | (5,924,333) | | | (207) | % | Selling, general and administrative expenses | 36,641 | | | 4,177 | | | (32,464) | | | (777) | % |
Depreciation and amortization attributable to operating expenses | Depreciation and amortization attributable to operating expenses | 26,916 | | | 26,916 | | | — | | | — | % | Depreciation and amortization attributable to operating expenses | 763 | | | 27 | | | (736) | | | (2,726) | % |
| Total operating expenses | Total operating expenses | 8,809,311 | | | 2,884,978 | | | (5,924,333) | | | (205) | % | Total operating expenses | 37,404 | | | 4,204 | | | (33,200) | | | (790) | % |
| | Loss from operations | Loss from operations | (7,272,052) | | | (760,935) | | | (6,511,117) | | | (856) | % | Loss from operations | (33,129) | | | (2,133) | | | (30,996) | | | (1,453) | % |
| Other income (expense): | Other income (expense): | | Other income (expense): | |
| Interest income | | Interest income | 18 | | | — | | | 18 | | | 100 | % |
Other income | Other income | 414,972 | | | — | | | 414,972 | | | 100 | % | Other income | 152 | | | 4,222 | | | (4,070) | | | (96) | % |
Gain on asset sales | Gain on asset sales | 57,402 | | | 1,424 | | | 55,978 | | | 3,931 | % | Gain on asset sales | — | | | — | | | — | | | — | % |
Loss on change in value of derivative warrant liability | Loss on change in value of derivative warrant liability | (3,578,947) | | | (1,780,203) | | | (1,798,744) | | | (101) | % | Loss on change in value of derivative warrant liability | (945) | | | (21,508) | | | 20,563 | | | 96 | % |
| Interest expense | Interest expense | (4,229,884) | | | (112,142) | | | (4,117,742) | | | (3,672) | % | Interest expense | (47,722) | | | (139) | | | (47,583) | | | (34,232) | % |
Total other expense | Total other expense | (7,336,457) | | | (1,890,921) | | | (5,445,536) | | | (288) | % | Total other expense | (48,497) | | | (17,425) | | | (31,072) | | | (178) | % |
| Loss from continuing operation before income tax | Loss from continuing operation before income tax | (14,608,509) | | | (2,651,856) | | | (11,956,653) | | | (451) | % | Loss from continuing operation before income tax | (81,626) | | | (19,558) | | | (62,068) | | | (317) | % |
| Income tax benefit (expense) | Income tax benefit (expense) | — | | | — | | | — | | | — | % | Income tax benefit (expense) | — | | | — | | | — | | | — | % |
| Loss from continuing operations | Loss from continuing operations | (14,608,509) | | | (2,651,856) | | | (11,956,653) | | | (451) | % | Loss from continuing operations | (81,626) | | | (19,558) | | | (62,068) | | | (317) | % |
Income from discontinued operations, net of tax | Income from discontinued operations, net of tax | 13,799,642 | | | 5,617,194 | | | 8,182,448 | | | 146 | % | Income from discontinued operations, net of tax | 17,844 | | | 3,601 | | | 14,243 | | | 396 | % |
Net income (loss) attributable to non-controlling interest and redeemable non-controlling interest from continuing operations | (68,164) | | | 382,666 | | | (450,830) | | | (118) | % | |
Net loss | | Net loss | (63,782) | | | (15,957) | | | (47,825) | | | 79 | % |
Net income attributable to non-controlling interest and redeemable non-controlling interest from continuing operations | | Net income attributable to non-controlling interest and redeemable non-controlling interest from continuing operations | 165 | | | 243 | | | (78) | | | (32) | % |
Net income attributable to non-controlling interest and redeemable non-controlling from discontinued operations | Net income attributable to non-controlling interest and redeemable non-controlling from discontinued operations | 3,806,753 | | | 1,608,303 | | | 2,198,450 | | | 137 | % | Net income attributable to non-controlling interest and redeemable non-controlling from discontinued operations | 3,023 | | | 3,175 | | | (152) | | | (5) | % |
Net income (loss) attributable to Vertex Energy, Inc. | $ | (4,547,456) | | | $ | 974,369 | | | $ | (5,521,825) | | | (567) | % | |
Net loss attributable to Vertex Energy, Inc. | | Net loss attributable to Vertex Energy, Inc. | $ | (66,970) | | | $ | (19,375) | | | $ | (47,595) | | | 116 | % |
|
Our operating results are significantly affected by the Mobile Refinery acquisition, which closed on April 1, 2022. During the three months ended June 30, 2022, the Mobile Refinery generated approximately $922 million of revenue, cost of revenues associated with the Mobile Refinery were $917 million, there was $4 million of depreciation and amortization to both cost of revenue and operating expenses, and $22 million of selling, general and administrative expenses.
Our revenues and cost of revenues are also significantly impacted by fluctuations in commodity prices; increases in commodity prices typically result in increases in revenue and cost of revenues (i.e., feedstock acquisition costs). Our gross profit is to a large extent a function of the market discount we are able to obtain in purchasing feedstock, as well as how efficiently management conducts operations. During the three months ended March 31,June 30, 2022, compared to the same period in 2021, we saw a 3% increase16% decrease in the volume of products we managedmanage through our facilities.facilities (mainly as a result of the Mobile Refinery acquisition and
increased volumes processed through such facility) In addition, we saw an increase in operating costs (inclusive of depreciation and amortization) on a per barrel basis for the firstsecond quarter of 2022 as compared to the same period in 2021.
Total revenues increased by 61%approximately $961.6 million, of which $922.2 million was from the Mobile Refinery and $39.4 million of the increase from other business for the three months ended March 31,June 30, 2022, compared to the same period in 2021,2021. The $39.4 million increase was due primarily to higher commodity prices and increased volumes at our facilities. Volumes improved as a result of additional feedstock availability in the overall marketplace.
During the three months ended March 31,June 30, 2022, total cost of revenues (exclusive of depreciation and amortization) increased approximately $956 million, of which $917 million was $38,565,484from the Mobile Refinery and $39 million was from other business compared to $22,808,703 for the three monthssame period ended March 31, 2021, an increase of $15,756,781 or 69% from the
prior period.June 30, 2021. The main reason for the $39 million increase was the result of the increase in commodity prices which impacted our feedstock pricing.pricing and certain operational expenses. Our cost of revenues is a function of the ultimate price we are required to pay to acquire feedstocks and other maintenance costs at our facilities.
We had selling, general and administrative expenses of $8,782,395approximately $36.6 million for the three months ended March 31,June 30, 2022, compared to $2,858,062$4.2 million from the prior year’s period, an increase of $5,924,333approximately $32.5 million or 207%777% from the prior year’s period. This increase is primarily due to the additional$22 million of selling, general and administrative expenses incurred during the period as a result of increased personnel costs, legal expenses, and insurance expenses related to our expansion of trucks and facilities which were acquired and organic growth. In addition, we had significant business development and related expenses relatedrelating to the Mobile Refinery Purchase Agreement and related transactions, in addition to the termination fee related to the termination$8 million of the Safety-Kleen transaction.Mobile Refinery acquisition costs.
For the three months ended March 31,June 30, 2022, total depreciation and amortization expense attributable to cost of revenues was $114,053,$3.1 million, compared to $112,497$0.1 million for the three months ended March 31,June 30, 2021, an increase of $1,556,$3.0 million, mainly due to Mobile Refinery assets acquired and additional investments in rolling stock and facility assets during the fourth quarter of 2021, which increased depreciation and amortization in 2022.
We had gross profit as a percentage of revenue of 3.8%0.4% for the three months ended March 31,June 30, 2022, compared to gross profit as a percentage of revenues of 8.5%6.9% for the three months ended March 31,June 30, 2021. The main reason for the decrease was the increase in commodity pricesrecognition of a $94 million loss from hedging activities for Mobile Refinery inventory during the period.
Additionally, our per barrel margin decreased 33%21% for the three months ended March 31,June 30, 2022, relative to the three months ended March 31,June 30, 2021. Our per barrel margin is calculated by dividing the total volume of product sold (in bbls) by total gross profit for the applicable period ($1,537,2594.3 million for the 2022 period versus $2,124,043$2.1 million for the 2021 period). This decrease was a result of the decrease in our product spreads related to increases in feedstock prices and increases in operating maintenance costs at our facilities, during the three months ended March 31,June 30, 2022, compared to the same period during 2021.
Overall, commodity prices were up for the three months ended March 31,June 30, 2022, compared to the same period in 2021. For example, the average posting (U.S. Gulfcoast Residual Fuel No. 6 3%) for the three months ended March 31,June 30, 2022, increased 30.90%61% per barrel from a three-month average of $52.54$58.59 for the three months ended March 31,June 30, 2021 to $83.44$94.11 per barrel for the three months ended March 31,June 30, 2022. The average posting (U.S. Gulfcoast Unleaded 87 Waterborne) for the three months ended March 31,June 30, 2022 increased $43.40$67.79 per barrel from a three-month average of $73.18$86.55 for the three months ended March 31,June 30, 2021 to $116.58$154.35 per barrel for the three months ended March 31,June 30, 2022.
We had loss from operations of $7,272,052approximately $33.1 million for the three months ended March 31,June 30, 2022, compared to loss from operations of $760,935$2.1 million for the three months ended March 31,June 30, 2021, an increase of $6,511,117 or 856%$30.2 million from the prior year’s three-month period. The increase in loss from operations was mostly due to a $21 million loss from the Mobile Refinery and $8 million of acquisition costs business development expenses related to the transactions contemplated by the Sale Agreement (which was terminated as of January 25, 2022) and the Refinery Purchase Agreement and related transactions.
We had interest expense of $4,229,884$47.7 million for the three months ended March 31,June 30, 2022, compared to interest expense of $112,142$139 thousand for the three months ended March 31,June 30, 2021, an increase in interest expense of $4,117,742$47.6 million or 3,672%34,232% from the prior period, due to the unamortized deferred loan costs related to the conversion of Convertible Senior Notes to common stock during the period and the interest associated with the Convertible Senior Convertible Notes, which were issued on November 1, 2021.2021, and the Term Loan, which was issued on April 1, 2022 ($125 million) and May 26, 2022 ($40 million).
We had a $3,578,947an approximately $0.9 million loss on change in value of derivative liability for the three months ended March 31,June 30, 2022, in connection with the Senior Convertible Noteswarrants granted in connection with the Term Loan issued on NovemberApril 1, 2021,2022 (warrants to purchase 2.75 million shares) and May 26, 2022 (warrants to purchase 0.25 million shares), compared to a gainloss on change in the value of our derivative liability of $1,780,203$21.5 million in the prior year’s period, which was in connection with certain warrants granted in May 2016. This change was mainly due to the fluctuation in the market price of our common stock (and more specifically the increase in the market price of our common stock during the current period, compared to the prior period), warrant exercises, and non-cash accounting adjustments in connection therewith. This resulted in a significant change in non-cash expense for the period, compared to the prior year’s period.
We had net loss from continuing operations of $14,608,509approximately $80.9 million for the three months ended March 31,June 30, 2022, compared to net loss from continuing operations of $2,651,856$19.6 million for the three months ended March 31,June 30, 2021, an increase in net loss from continuing operations of $11,956,653$61.3 million or 451%317%. The main reason for the increase in net loss for the three months ended March 31,June 30, 2022, compared to the three months ended March 31,June 30, 2021, was attributable to the loss on inventory hedging activities, acquisition costs and the increase in loss on change in value of derivative liability, interest expenses and business development expenses for the three months ended March 31,June 30, 2022, each as described in greater detail above.
Each of our segments’ income (loss) from operations during the three months ended March 31,June 30, 2022 and 2021 was as follows:follows (in thousands):
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| Three Months Ended March 31, | | $ Change - Favorable (Unfavorable) | | % Change - Favorable (Unfavorable) |
Black Oil Segment | 2022 | | 2021 |
Revenues | $ | 1,550,287 | | | $ | 122,986 | | | $ | 1,427,301 | | | 1,161 | % |
Cost of revenues (exclusive of depreciation and amortization shown separately below) | 1,649,972 | | | 280,378 | | | (1,369,594) | | | (488) | % |
Depreciation and amortization attributable to costs of revenues | 16,411 | | | 20,382 | | | 3,971 | | | 19 | % |
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Gross loss | (116,096) | | | (177,774) | | | 61,678 | | | 35 | % |
Selling general and administrative expense | 7,411,220 | | | 1,942,399 | | | (5,468,821) | | | (282) | % |
Depreciation and amortization attributable to operating expenses | 26,916 | | | 26,916 | | | — | | | — | % |
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Loss from operations | $ | (7,554,232) | | | $ | (2,147,089) | | | $ | (5,407,143) | | | (252) | % |
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Refining and Marketing Segment | | | | | | | |
Revenues | $ | 34,718,918 | | | $ | 19,273,952 | | | $ | 15,444,966 | | | 80 | % |
Cost of revenues (exclusive of depreciation and amortization shown separately below) | 33,086,160 | | | 17,949,695 | | | (15,136,465) | | | (84) | % |
Depreciation and amortization attributable to costs of revenues | 23,370 | | | 31,876 | | | 8,506 | | | 27 | % |
Gross profit | 1,609,388 | | | 1,292,381 | | | 317,007 | | | 25 | % |
Selling general and administrative expense | 1,124,336 | | | 759,409 | | | (364,927) | | | (48) | % |
Depreciation and amortization attributable to operating expenses | — | | | — | | | — | | | — | % |
Income from operations | $ | 485,052 | | | $ | 532,972 | | | $ | (47,920) | | | (9) | % |
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Recovery Segment | | | | | | | |
Revenues | $ | 3,947,591 | | | $ | 5,648,305 | | | $ | (1,700,714) | | | (30) | % |
Cost of revenues (exclusive of depreciation and amortization shown separately below) | 3,829,352 | | | 4,578,630 | | | 749,278 | | | 16 | % |
Depreciation and amortization attributable to costs of revenues | 74,272 | | | 60,239 | | | (14,033) | | | (23) | % |
Gross profit | 43,967 | | | 1,009,436 | | | (965,469) | | | (96) | % |
Selling general and administrative expense | 246,839 | | | 156,254 | | | (90,585) | | | (58) | % |
Depreciation and amortization attributable to operating expenses | — | | | — | | | — | | | — | % |
Income (loss) from operations | $ | (202,872) | | | $ | 853,182 | | | $ | (1,056,054) | | | (124) | % |
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| Three Months Ended June 30, | | $ Change - Favorable (Unfavorable) | | % Change - Favorable (Unfavorable) |
Black Oil Segment | 2022 | | 2021 |
Revenues | $ | 20,254 | | | $ | 155 | | | $ | 20,099 | | | 12,967 | % |
Cost of revenues (exclusive of depreciation and amortization shown separately below) | 20,147 | | | 363 | | | (19,784) | | | (5,450) | % |
Depreciation and amortization attributable to costs of revenues | 31 | | | 19 | | | (12) | | | (63) | % |
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Gross profit (loss) | 76 | | | (227) | | | 39,895 | | | 35 | % |
Selling general and administrative expense | 12,027 | | | 3,281 | | | (8,746) | | | (267) | % |
Depreciation and amortization attributable to operating expenses | 27 | | | 27 | | | — | | | — | % |
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Loss from operations | $ | (11,978) | | | $ | (3,535) | | | $ | 48,641 | | | (239) | % |
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Refining and Marketing Segment | | | | | | | |
Revenues | $ | 966,390 | | | $ | 23,836 | | | $ | 942,554 | | | 3,954 | % |
Cost of revenues (exclusive of depreciation and amortization shown separately below) | 959,767 | | | 22,248 | | | (937,519) | | | (4,214) | % |
Depreciation and amortization attributable to costs of revenues | 3,009 | | | 31 | | | (2,978) | | | (9,606) | % |
Gross profit | 3,614 | | | 1,557 | | | 2,057 | | | 132 | % |
Selling general and administrative expense | 23,597 | | | 687 | | | (22,910) | | | (3,335) | % |
Depreciation and amortization attributable to operating expenses | 736 | | | — | | | (736) | | | (100) | % |
Income (loss) from operations | $ | (20,719) | | | $ | 870 | | | $ | 25,703 | | | (2,481) | % |
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Recovery Segment | | | | | | | |
Revenues | $ | 5,195 | | | $ | 6,237 | | | $ | (1,042) | | | (17) | % |
Cost of revenues (exclusive of depreciation and amortization shown separately below) | 4,528 | | | 5,430 | | | 902 | | | 17 | % |
Depreciation and amortization attributable to costs of revenues | 82 | | | 66 | | | (16) | | | (24) | % |
Gross profit | 585 | | | 741 | | | (156) | | | (21) | % |
Selling general and administrative expense | 1,017 | | | 209 | | | (808) | | | (387) | % |
Depreciation and amortization attributable to operating expenses | — | | | — | | | — | | | — | % |
Income (loss) from operations | $ | (432) | | | $ | 532 | | | $ | (964) | | | (181) | % |
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Our Black Oil segment generated revenues of $1.6approximately $20.3 million for the three months ended March 31,June 30, 2022, with cost of revenues (exclusive of depreciation and amortization) of $1.6$20.1 million, and depreciation and amortization attributable to cost of revenues of $16,411.$31 thousand. During the three months ended March 31,June 30, 2021, these revenues were $123 thousand$0.2 million with cost of revenues (exclusive of depreciation and amortization) of $280 thousand$0.4 million and depreciation and amortization attributable to cost of revenues of $20,382.$19 thousand. Revenue from operations increased for the three months ended March 31,June 30, 2022, compared to 2021, as a result of increases in commodity prices, and a new Marine Division which provided positive revenue and a profit for the period, which was created at the end of 2021 for blending bunker fuels into the Gulf Coast Market. The total loss was $7.6$12 million for the three months
ended March 31,June 30, 2022, which increased $5.4$8 million compared to the same period ended March 31,June 30, 2021, due to the costs related to the Shell plant purchaseacquisition and proposed sale of the UMO Business.
Our Refining segment includes the business operations of our Refining and Marketing operations, as well as Crystal Energy, LLC ("Crystal")which includes Mobile Refinery. Since the acquisition of Crystal in June 2020, we have operated as a wholesale distributer of motor fuels which include gasoline, blended gasoline and diesel. Revenues of $34.7$966 million in the Refining segment were up 80%3,954% during the three months ended March 31,June 30, 2022, as compared to the same period in 2021 mostly as a result of the operations of the Mobile Refinery, which had $922 million of revenue and the increased commodity prices and volume during the three months ended March 31,June 30, 2022. Overall volume for the Refining and Marketing segment was increased during the three months ended March 31,June 30, 2022, as compared to the same period in 2021. Our pygas volumes decreased 3% for the
three months ended March 31, 2022, as compared to the same period in 2021. Our fuel oil cutter volumes decreased 4% for the three months ended March 31, 2022, as compared to the same period in 2021, volumes in our gasoline blending business increased 9% during the three months ended March 31, 2022, as compared to the same period in 2021.
Our Recovery segment generated revenues of $3.9approximately $5 million for the three months ended March 31,June 30, 2022, with cost of revenues (exclusive of depreciation and amortization) of $3.8$5 million, and depreciation and amortization attributable to cost of revenues of $74,272.$82 thousand. During the three months ended March 31,June 30, 2021, these revenues were $5.6$6 million with cost of revenues (exclusive of depreciation and amortization) of $4.6$5 million, , and depreciation and amortization attributable to cost of revenues of $60,239.$66 thousand. Loss from operations of $202,872$0.4 million for the three months ended March 31,June 30, 2022, compared to profit from operation of $853,182$0.5 million in 2021, was a result of higher commodity costs, less metal sales in volumes, which caused lower margins related thereto. This segment periodically participates in project work that is not ongoing thus we expect to see fluctuations in revenue and gross profit from this segment from period to period.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2022 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2021 FROM CONTINUING OPERATIONS
Set forth below are our results of operations for the six months ended June 30, 2022 as compared to the same period in 2021 (in thousands):
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| | Six Months Ended June 30, | | $ Change - Favorable (Unfavorable) | | % Change - Favorable (Unfavorable) | |
| | 2022 | | 2021 |
Revenues | | $ | 1,032,056 | | | $ | 55,273 | | | $ | 976,783 | | | 1,767 | % | |
Cost of revenues (exclusive of depreciation and amortization shown separately below) | | 1,023,008 | | | 50,850 | | | (972,158) | | | (1,912) | % | |
Depreciation and amortization attributable to costs of revenues | | 3,236 | | | 228 | | | (3,008) | | | (1,319) | % | |
Gross Profit | | 5,812 | | | 4,195 | | | 1,617 | | | 39 | % | |
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Operating expenses: | | | | | | | | | |
Selling, general and administrative expenses | | 45,423 | | | 7,035 | | | (38,388) | | | (546) | % | |
Depreciation and amortization attributable to operating expenses | | 790 | | | 54 | | | (736) | | | (1,363) | % | |
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Total operating expenses | | 46,213 | | | 7,089 | | | (39,124) | | | (552) | % | |
Loss from operations | | (40,401) | | | (2,894) | | | (37,507) | | | (1,296) | % | |
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Other income (expense): | | | | | | | | | |
Interest income | | 18 | | | — | | | 18 | | | 100 | % | |
Other Income | | 625 | | | 4,223 | | | (3,598) | | | (85) | % | |
Bargain purchase gain related to Omega acquisition | | — | | | — | | | — | | | — | % | |
Loss on sale of assets | | — | | | — | | | — | | | — | % | |
Loss on change in value of derivative liability | | (4,524) | | | (23,288) | | | 18,764 | | | 81 | % | |
Gain (loss) on futures contracts | | — | | | — | | | — | | | — | % | |
Interest expense | | (51,952) | | | (251) | | | (51,701) | | | (20,598) | % | |
Total other expense | | (55,833) | | | (19,316) | | | (36,517) | | | — | | |
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Loss before income taxes | | (96,234) | | | (22,210) | | | (74,024) | | | (333) | % | |
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Income tax (expense) benefit | | — | | | — | | | — | | | — | % | |
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Net loss from continuing operations | | (96,234) | | | (22,210) | | | (74,024) | | | (333) | % | |
Income (loss) from discontinued operations (see Note 15) | | 31,643 | | | 9,219 | | | 25,222 | | | 303 | % | |
Net income attributable to non-controlling interest and redeemable non-controlling interest from continued operations | | 97 | | | 626 | | | (529) | | | (85) | % | |
Net income attributable to non-controlling interest and redeemable non-controlling interest from discontinued operations | | 6,829 | | | 4,783 | | | 2,046 | | | 43 | % | |
Net loss attributable to Vertex Energy, Inc. | | $ | (71,517) | | | $ | (18,400) | | | $ | (27,895) | | | (152) | % | |
Our revenues and cost of revenues are significantly impacted by the recently acquired Mobile Refinery and fluctuations in commodity prices; increases in commodity prices typically result in increases in revenue and cost of revenues (i.e., feedstock acquisition costs). Additionally, we use hedging instruments to manage our exposure to underlying commodity prices. Our gross profit is to a large extent a function of the market discount we are able to obtain in purchasing feedstock, as well as how efficiently management conducts operations. As demand for feedstock increases, the prices we are required to pay for such feedstock typically increases as well.
Our cost of revenues is a function of the ultimate price we are required to pay to acquire feedstocks, how efficient we are in acquiring such feedstocks as well as how efficiently we operate our facilities, and other maintenance at our facilities.
Total revenues increased by 1,767% for the six months ended June 30, 2022 compared to the same period in 2021, due primarily to the Mobile Refinery acquisition, which Mobile Refinery generated approximately $922 million in revenue and higher commodity prices and increased volumes across our facilities, during the six months ended June 30, 2022, compared to the prior year’s period.
During the six months ended June 30, 2022, total cost of revenues (exclusive of depreciation and amortization) was $1 billion, compared to $50.9 million for the six months ended June 30, 2021, an increase of $972.2 million or 1,912% from the prior period. The main reason for the increase was the addition of the Mobile Refinery business which started on April 1, 2022, in addition to higher commodity prices, which impacted our feedstock pricing, and increases in volumes throughout the business.
For the six months ended June 30, 2022, total depreciation and amortization expense attributable to cost of revenues was approximately $3.2 million, compared to $0.2 million for the six months ended June 30, 2021, an increase of $3.0 million, mainly due to assets acquired with the Mobile Refinery purchase.
We had gross profit as a percentage of revenue of 0.6% for the six months ended June 30, 2022, compared to gross profit as a percentage of revenues of 7.6% for the six months ended June 30, 2021. The decrease mainly due to the recognition of $94 million loss of inventory hedging activities, which was reported as cost of revenue, during the period.
We had selling, general, and administrative expenses of approximately $45.4 million for the six months ended June 30, 2022, compared to $7.0 million for the prior year’s period, an increase of $38.4 million or 546%. This increase is primarily due to $22 million of selling, general and administrative expenses relating to the Mobile Refinery and $13.6 million of Mobile Refinery acquisition costs and business development expenses related to the transactions contemplated by the Sale Agreement (which was terminated as of January 25, 2022) and the Refinery Purchase Agreement and related transactions.
We had loss from operations of approximately $40.4 million for the six months ended June 30, 2022, compared to a loss from operations of $2.9 million for the six months ended June 30, 2021, an increase of $37.5 million in loss from the prior year’s six-month period. The increase in loss from operations was mostly due to the cost of the Mobile Refinery acquisition and hedging loss.
We had interest expense of approximately $52.0 millionfor the six months ended June 30, 2022, compared to interest expense of $0.3 million for the six months ended June 30, 2021, an increase in interest expense of $51.7 million due to a higher amount of term debt outstanding during the six months ended June 30, 2022, compared to the prior period, the unamortized deferred loan costs related to the conversion of Convertible Senior Notes to common stock during the period and the interest associated with the Convertible Senior Notes, which were issued on November 1, 2021, and the Term Loan, which was issued on April 1, 2022 ($125 million) and May 26, 2022 ($40 million).
We had an approximately $4.5 million loss on change in value of derivative liability for the six months ended June 30, 2022, in connection with certain warrants granted in April and May 2022, compared to a loss on change in the value of our derivative liability of $23.3 million in the prior year’s period, which related to warrants granted in June 2015 and May 2016 and expired during 2021. This change was mainly due to the fluctuation in the market price of our common stock (and more specifically the significant increase in the market price of our common stock during the current period), warrant exercises, and non-cash accounting adjustments in connection therewith. This resulted in a significant change in non-cash expense for the period, compared to the prior year’s period.
We had a net loss from continuing operations of approximately $96.2 millionfor the six months ended June 30, 2022, compared to a net loss from continuing operations of $22.2 million for the six months ended June 30, 2021, an increase in net loss of $74.0 million or 333% from the prior period due to the reasons described above. The majority of our net loss for the six months ended June 30, 2022, was attributable to the loss on hedging activities and amortized deferred loan cost and discount, which was reported as interest expenses, related to the conversion of Convertible Senior Notes, which is a non-cash expense.
Each of our segments’ income (loss) from operations during the six months ended June 30, 2022 and 2021 was as follows (in thousands):
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| | Six Months Ended June 30, | | $ Change - Favorable (Unfavorable) | | % Change - Favorable (Unfavorable) | |
Black Oil Segment | | 2022 | | 2021 |
Revenues | | $ | 21,804 | | | $ | 278 | | | $ | 21,526 | | | 7,743 | % | |
Cost of revenues (exclusive of depreciation and amortization shown separately below) | | 21,797 | | | 643 | | | (21,154) | | | (3,290) | % | |
Depreciation and amortization attributable to costs of revenues | | 47 | | | 39 | | | (8) | | | (21) | % | |
Gross loss | | (40) | | | (404) | | | 364 | | | 90 | % | |
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Selling, general and administrative expense | | 19,438 | | | 5,223 | | | (14,215) | | | (272) | % | |
Depreciation and amortization attributable to operating expenses | | 54 | | | 54 | | | — | | | — | % | |
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Loss from operations | | $ | (19,532) | | | $ | (5,681) | | | $ | (13,851) | | | (244) | % | |
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Refining Segment | | | | | | | | | |
Revenues | | $ | 1,001,109 | | | $ | 43,110 | | | $ | 957,999 | | | 2,222 | % | |
Cost of revenues (exclusive of depreciation and amortization shown separately below) | | 992,852 | | | 40,198 | | | (952,654) | | | (2,370) | % | |
Depreciation and amortization attributable to costs of revenues | | 3,033 | | | 63 | | | (2,970) | | | (4,714) | % | |
Gross profit | | 5,224 | | | 2,849 | | | 2,375 | | | 83 | % | |
Selling, general and administrative expense | | 24,721 | | 1,447 | | (23,274) | | (1,608)% | |
Depreciation and amortization attributable to operating expenses | | 736 | | — | | (736) | | (100)% | |
Income (loss) from operations | | $ | (20,233) | | $ | 1,402 | | $ | (21,635) | | (1,543)% | |
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Recovery Segment | | | | | | | | | |
Revenues | | $ | 9,143 | | $ | 11,885 | | $ | (2,742) | | (23)% | |
Cost of revenues (exclusive of depreciation and amortization shown separately below) | | 8,357 | | 10,009 | | 1,652 | | 17% | |
Depreciation and amortization attributable to costs of revenues | | 156 | | 126 | | (30) | | (24)% | |
Gross loss | | 630 | | 1,750 | | (1,120) | | (64)% | |
Selling, general and administrative expense | | 1,264 | | 365 | | (899) | | (246)% | |
Depreciation and amortization attributable to operating expenses | | — | | — | | — | | —% | |
Loss from operations | | $ | (634) | | $ | 1,385 | | $ | (2,019) | | (146)% | |
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Our Black Oil segment generated revenues of approximately $21.8 million for the six months ended June 30, 2022, with cost of revenues (exclusive of depreciation and amortization) of $21.8 million, and depreciation and amortization attributable to cost of revenues of $47 thousand. During the six months ended June 30, 2021, these revenues were $0.3 millionwith cost of revenues (exclusive of depreciation and amortization) of $0.6 million, and depreciation and amortization attributable to cost of revenues of $39 thousand. Loss from operations decreased for the six months ended June 30, 2022, compared to 2021, as a result of higher commodity prices and increased operating expenses during the six months ended June 30, 2022. In addition, a new Marine Division which provided positive revenue and profit for the period, was created at the end of 2021 for blending bunker fuels into the Gulf Coast Market.
Our Refining segment includes the business operations of our Refining and Marketing operations, as well as the Mobile Refinery acquired on April 1, 2022. During the six months ended June 30, 2022, our Refining and Marketing cost of revenues (exclusive of depreciation and amortization) were approximately $993 million, of which the processing costs for the Mobile Refinery were $917 million, and depreciation and amortization attributable to cost of revenues was $3.0 million. Revenues for the
same period were $1 billion, of which $922 million related to the Mobile Refinery operation. During the six months ended June 30, 2021, our Refining and Marketing cost of revenues (exclusive of depreciation and amortization) were $40 million, and depreciation and amortization attributable to cost of revenues of $63 thousand. Revenues for the same period were $43 million.
Our Recovery segment generated revenues of approximately $9 million for the six months ended June 30, 2022, with cost of revenues (exclusive of depreciation and amortization) of $8 million, and depreciation and amortization attributable to cost of revenues of $0.2 million. During the six months ended June 30, 2021, these revenues were $12 million with cost of revenues (exclusive of depreciation and amortization) of $10 million, and depreciation and amortization attributable to cost of revenues of $0.1 million. Income from operations decreased for the six months ended June 30, 2022, compared to 2021, as a result of decreased volumes attributable to our Recovery segment and margins related thereto, through our various facilities. For the six months ended on June 30, 2021, this segment benefited from certain one-time projects that drive increases in volumes as well as revenues and margins from time to time and were completed within 2021.
Our Recovery segment includes the business operations of Vertex Recovery Management as well as our Group III base oil business. Vertex previously acted as Penthol’s exclusive agent to provide marketing, sales, and logistical duties of Group III base oil from the United Arab Emirates to the United States from June 2016 to January 2021. Vertex and Penthol are currently involved in ongoing litigation described in greater detail above under “Part I” -“Item 1. Financial Statements” in the Notes to Consolidated Financial Statements in “Note 3. Concentrations, Significant Customers, Commitments and Contingencies”, under the heading “Litigation”. Revenues for this segment increased 23% as a result of increased commodity prices when compared to the same period in 2021. Volumes of products acquired in our Recovery business were down 12% during the six months ended June 30, 2022, compared to the same period during 2021. This segment periodically participates in project work that is not ongoing, thus we expect to see fluctuations in revenue and income before income taxes from period to period. These projects are typically bid related and can take time to line out and get started; however, we believe these are very good projects for the Company and we anticipate more in the upcoming periods.
The following table sets forth the high and low spot prices during the threesix months ended March 31,June 30, 2022, for our key benchmarks.
| 2022 | 2022 | | 2022 | |
Benchmark | Benchmark | | High | | Date | | Low | | Date | Benchmark | | High | | Date | | Low | | Date |
U.S. Gulfcoast No. 2 Waterborne (dollars per gallon) | U.S. Gulfcoast No. 2 Waterborne (dollars per gallon) | | $ | 4.36 | | | March 8 | | $ | 2.15 | | | January 3 | U.S. Gulfcoast No. 2 Waterborne (dollars per gallon) | | $ | 4.36 | | | March 8 | | $ | 2.15 | | | January 3 |
U.S. Gulfcoast Unleaded 87 Waterborne (dollars per gallon) | U.S. Gulfcoast Unleaded 87 Waterborne (dollars per gallon) | | $ | 3.53 | | | March 8 | | $ | 2.26 | | | January 3 | U.S. Gulfcoast Unleaded 87 Waterborne (dollars per gallon) | | $ | 4.35 | | | June 3 | | $ | 2.26 | | | January 3 |
U.S. Gulfcoast Residual Fuel No. 6 3% (dollars per barrel) | U.S. Gulfcoast Residual Fuel No. 6 3% (dollars per barrel) | | $ | 112.93 | | | March 8 | | $ | 67.84 | | | January 3 | U.S. Gulfcoast Residual Fuel No. 6 3% (dollars per barrel) | | $ | 112.93 | | | March 8 | | $ | 67.84 | | | January 3 |
NYMEX Crude oil (dollars per barrel) | NYMEX Crude oil (dollars per barrel) | | $ | 123.70 | | | March 8 | | $ | 76.08 | | | January 3 | NYMEX Crude oil (dollars per barrel) | | $ | 123.70 | | | March 8 | | $ | 76.08 | | | January 3 |
Reported in Platt’s US Marketscan (Gulf Coast) | Reported in Platt’s US Marketscan (Gulf Coast) | | | | | | | Reported in Platt’s US Marketscan (Gulf Coast) | | | | | | |
The following table sets forth the high and low spot prices during the threesix months ended March 31,June 30, 2021, for our key benchmarks.
| 2021 | 2021 | | 2021 | |
Benchmark | Benchmark | | High | | Date | | Low | | Date | Benchmark | | High | | Date | | Low | | Date |
U.S. Gulfcoast No. 2 Waterborne (dollars per gallon) | U.S. Gulfcoast No. 2 Waterborne (dollars per gallon) | | $ | 1.79 | | | March 12 | | $ | 1.32 | | | January 4 | U.S. Gulfcoast No. 2 Waterborne (dollars per gallon) | | $ | 2.10 | | | June 22 | | $ | 1.32 | | | January 4 |
U.S. Gulfcoast Unleaded 87 Waterborne (dollars per gallon) | U.S. Gulfcoast Unleaded 87 Waterborne (dollars per gallon) | | $ | 2.13 | | | March 11 | | $ | 1.36 | | | January 4 | U.S. Gulfcoast Unleaded 87 Waterborne (dollars per gallon) | | $ | 2.21 | | | June 23 | | $ | 1.36 | | | January 4 |
U.S. Gulfcoast Residual Fuel No. 6 3% (dollars per barrel) | U.S. Gulfcoast Residual Fuel No. 6 3% (dollars per barrel) | | $ | 59.54 | | | March 5 | | $ | 45.08 | | | January 4 | U.S. Gulfcoast Residual Fuel No. 6 3% (dollars per barrel) | | $ | 64.92 | | | June 25 | | $ | 45.08 | | | January 4 |
NYMEX Crude oil (dollars per barrel) | NYMEX Crude oil (dollars per barrel) | | $ | 66.09 | | | March 5 | | $ | 47.62 | | | January 4 | NYMEX Crude oil (dollars per barrel) | | $ | 74.05 | | | June 25 | | $ | 47.62 | | | January 4 |
Reported in Platt’s US Marketscan (Gulf Coast) | Reported in Platt’s US Marketscan (Gulf Coast) | | | | | | | Reported in Platt’s US Marketscan (Gulf Coast) | | | | | | |
We saw an increase in the first quartersix months of 2022, in each of the benchmark commodities we track compared to the same period in 2021. The increase in market prices was a result of a continued recovery of the economy from the pandemic together with geopolitical tensions.
Our margins are a function of the difference between what we are able to pay for raw materials and the market prices for the range of products produced. The various petroleum products produced are typically a function of crude oil indices and are quoted on multiple exchanges such as the New York Mercantile Exchange (“NYMEX”). These prices are determined by a global
market and can be influenced by many factors, including but not limited to supply/demand, weather, politics, and global/regional inventory levels. As such, we cannot provide any assurances regarding results of operations for any future periods, as numerous factors outside of our control affect the prices paid for raw materials and the prices (for the most part keyed to the NYMEX) that can be charged for such products. Additionally, for the near term, results of operations will be subject to further uncertainty, as the global markets and exchanges, including the NYMEX, continue to experience volatility.
As our competitors bring new technologies to the marketplace, which will likely enable them to obtain higher values for the finished products created through their technologies from purchased black oil feedstock, we anticipate that they will have to pay more for feedstock due to the additional value received from their finished product (i.e., as their margins increase, they are able to increase the prices they are willing to pay for feedstock). If we are not able to continue to refine and improve our technologies and gain efficiencies in our technologies, we could be negatively impacted by the ability of our competitors to bring new processes to
market which compete with our processes, as well as their ability to outbid us for feedstock supplies. Additionally, if we are forced to pay more for feedstock, our cash flows will be negatively impacted and our margins will decrease.
Liquidity and Capital Resources
Our primary sources of liquidity have historically included cash flow from operations, proceeds from notes offerings, bank borrowings, term loans, public equity offerings and other financial arrangements. Uses of cash have included capital expenditures, acquisitions and general working capital.
The success of our current business operations has been dependent on our ability to manage our margins which are a function of the difference between what we are able to pay or charge for raw materials and the market prices for the range of products produced. We also must maintain relationships with feedstock suppliers and end-product customers (including Shell, Macquarie and others), and operate with efficient management of overhead costs. Through these relationships, we have historically been able to achieve volume discounts in the procurement of our feedstock, thereby increasing the margins of our segments’ operations. The resulting operating cash flow is crucial to the viability and growth of our existing business lines.
We had total assets of $280.5approximately $690.7 million as of March 31,June 30, 2022, compared to $266.1 million at December 31, 2021. The increase was mainly due to the acquisition of the Mobile Refinery, increases in accounts receivable and inventory levels, due to the increases in commodity prices and volumes and increases in investments for the new Mobile Refinery during the threesix months ended March 31, 2022, compared to the prior year's period.June 30, 2022.
We had total current liabilities of $58.9approximately $339.6 million as of March 31,June 30, 2022, compared to $49.2 million at December 31, 2021. We had total liabilities of $128.7$593.0 million as of March 31,June 30, 2022, compared to total liabilities of $192.5 million as of December 31, 2021. The increase in current liabilities was mainly due to the inventory financing liabilities, increase in accounts payable and accrued liabilities as a result of rises in commodity prices and volumes along with decreasesthe increase in current portion of debt due in less than a year whilecommodity derivative liabilities and the decrease in total liabilities was mainly due to the removal of the derivative feature associated with the Convertible Senior Notes as a result of shareholder approval for the issuance of shares of common stock upon conversionterm loan balance, thereof during the threesix months ended March 31, 2022, compared to the prior year’s period.June 30, 2022.
We had working capital of $182.3approximately $180.1 million as of March 31,June 30, 2022, compared to working capital of $185.0 million as of December 31, 2021. The decrease in working capital from December 31, 2021 to March 31,June 30, 2022 is mainly due to the increase in inventory, and accounts payable and accrued liabilities, and obligations under our inventory financing agreement (discussed above), for which the inventory was purchased in MarchJune 2022 to be used for the product and sale in early of AprilJuly 2022. Also we had a $3 million break fee paid for the termination of the Sales Agreement with Safety-Kleen.Safety-Kleen, and $8.2 million acquisition costs paid in connection with the Mobile Refinery purchase on April 1, 2022.
Market conditions have improved through the end of 2021 and into 2022, as COVID-19 restrictions have eased and demand for refined products has rebounded. Although commodity prices have rebounded, we are still seeing extreme volatility in commodity pricing, however, the increase in refined product pricing has had a positive impact on our business and overall liquidity.
Our future operating cash flows will vary based on a number of factors, many of which are beyond our control, including commodity prices, the cost of recovered oil, and the ability to turn our inventory. Other factors that have affected and are expected to continue to affect earnings and cash flow are transportation, processing, and storage costs. Over the long term, our operating cash flows will also be impacted by our ability to effectively manage our administrative and operating costs. Additionally, we may incur more capital expenditures related to new TCEP facilitiesthe Mobile Refinery in the future.
The Company’s outstanding debt facilities as of March 31,June 30, 2022 and December 31, 2021 (excluding the Convertible Senior Notes) are summarized as follows:
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Creditor | Loan Type | | Origination Date | | Maturity Date | | Loan Amount | | Balance on March 31, 2022 | | Balance on December 31, 2021 |
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John Deere Note | Note | | May 27, 2020 | | June 24, 2024 | | $ | 152,643 | | | $ | 84,537 | | | $ | 94,005 | |
AVT Equipment Lease-HH | Finance Lease | | May 22, 2020 | | May 22, 2023 | | $ | 551,609 | | | 263,065 | | | 302,166 | |
SBA Loan | SBA Loan | | July 18, 2020 | | July 18, 2050 | | $ | 58,700 | | | 58,700 | | | 58,700 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Various institutions | Insurance premiums financed | | Various | | < 1 year | | $ | 5,604,748 | | | 1,008,621 | | | 2,375,071 | |
Total | | | | | | | | | $ | 1,414,923 | | | $ | 2,829,942 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | |
Creditor | Loan Type | | | | | | | | Balance on June 30, 2022 | | Balance on December 31, 2021 |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Term Loan 2025 | Loan | | | | | | | | $ | 165,000 | | | $ | — | |
John Deere Note | Note | | | | | | | | — | | | 93 | |
AVT Equipment Lease-HH | Finance Lease | | | | | | | | — | | | 302 | |
SBA Loan | SBA Loan | | | | | | | | 59 | | | 59 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
VRA Finance lease | Finance Lease | | | | | | | | 45,291 | | | — | |
Various institutions | Insurance premiums financed | | | | | | | | 9,236 | | | 2,375 | |
Total | | | | | | | | | $ | 219,586 | | | $ | 2,829 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Future contractual maturities of notes payable are summarized as follows:follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Creditor | Year 1 | | Year 2 | | Year 3 | | Year 4 | | Year 5 | | Thereafter |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
John Deere Note | $ | 38,460 | | | $ | 39,414 | | | $ | 6,663 | | | $ | — | | | $ | — | | | $ | — | |
AVT Equipment Lease-HH | 263,065 | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
SBA Loan | — | | | 1,266 | | | 1,315 | | | 1,365 | | | 1,417 | | | 53,337 | |
| | | | | | | | | | | |
Various institutions | 1,008,621 | | | — | | | — | | | — | | | — | | | — | |
Totals | $ | 1,310,146 | | | $ | 40,680 | | | $ | 7,978 | | | $ | 1,365 | | | $ | 1,417 | | | $ | 53,337 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Creditor | Year 1 | | Year 2 | | Year 3 | | Year 4 | | Year 5 | | Thereafter |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Totals | $ | 14,013 | | | $ | 9,514 | | | $ | 154,049 | | | $ | 1,605 | | | $ | 1,809 | | | $ | 38,596 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Our Convertible Senior Notes will mature on October 1, 2027, unless earlier repurchased, redeemed or converted. The components of convertible notes are presented as follows:follows (in thousands):
| | | | | | | | |
| | March 31,June 30, 2022 |
Principal Amounts | | $ | 155,000,000 155,000 | |
Conversion of principal into common stock | | (59,822) | |
Unamortized discount and issuance costs | | (89,213,315)(53,635) | |
Net Carrying Amount | | $ | 65,786,68541,543 | |
Interest of the Convertible Senior Notes is payable semiannually in arrears on April 1 and October 1 of each year, beginning on April 1, 2022. The following table represents the future interest payment.payment (in thousands):
| Interest payable | Interest payable | | Year 1 | | Year 2 | | Year 3 | | Year 4 | | Year 5 | | Thereafter | Interest payable | | Year 1 | | Year 2 | | Year 3 | | Year 4 | | Year 5 | | Thereafter |
| Interest payable | Interest payable | | $ | 9,687,500 | | | $ | 9,714,041 | | | $ | 9,687,500 | | | $ | 9,687,500 | | | $ | 9,687,500 | | | $ | 4,857,021 | | Interest payable | | $ | 6,572 | | | $ | 5,949 | | | $ | 5,949 | | | $ | 5,949 | | | $ | 5,949 | | | $ | 2,974 | |
|
Cash Flows from Operating, Investing and Financing Activities
We believe that we have sufficient liquid assets, cash flow from operations, borrowing capacity and adequate access to capital markets to meet our financial commitments, debt service obligations and anticipated capital expenditures for at least the next 12 months. We expect that our short-term liquidity needs which include debt service, working capital, funds required to complete the transactions contemplated by the Heartland Purchase Agreement, and capital expenditures related to currently planned growth projects (including the renewable diesel conversion project designed to modify the Mobile Refinery's hydrocracking unit to produce renewable diesel fuel on a standalone basis) will be met through projected cash flow from operations, borrowings under our various facilities and asset sales.
Our current near term plans include transitioning the majority of our assets and operations away from used motor oil and towards several important objectives, the combination of which we believe will advance our strategy of becoming a leading pure-play energy transition company of scale in connection with the recent acquisition of the Mobile Refinery. The refinery, which has a long track record of safe, reliable operations and consistent financial performance, has, effective on April 1, 2022, upon the closing of the acquisition, become our flagship refining asset, which we believe positions us to become a pure-play producer of renewable and conventional products. The addition of renewable fuels production associated with the refinery is anticipated to accelerate Vertex’s strategic focus on "clean" refining. By year-end 2022, assuming the completion of the $90 to $100 million planned capital project at the facility, the Mobile Refinery is projected to produce approximately 8,000 to 10,000 barrels per day (bpd) of renewable diesel fuel and renewable byproducts. By mid-year 2023, based on current projections, Vertex expects to increase renewable diesel production to 14,000 bpd. Upon completion of the planned renewable diesel project, Vertex expects to become one of the leading independent producers of renewable fuels in the southeastern United States.
Additionally, we or our affiliates may, at any time and from time to time, retire or repurchase our outstanding Convertible Senior Notes in open-market purchases, privately negotiated transactions, refinancing or otherwise, through cash purchases and/or exchanges for equity or debt. Such repurchases, refinancings or exchanges, if any, will be upon such terms and at such prices as we may determine, and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions, and other factors. Repurchases, if any, will be funded through available cash from operations. The amounts involved may be material.
We anticipate that the market for our common stock will be subject to wide fluctuations in response to several factors moving forward, including, but not limited to:
(1)actual or anticipated variations in our results of operations;
(2)the market for, and volatility in, the market for oil and gas;
(3)our ability or inability to generate new revenues;
(4)the status of planned acquisitions and divestitures;divestitures and ongoing capital projects at our facilities; and
(5)the number of shares in our public float.
Furthermore, because our common stock is traded on The NASDAQ Capital Market, our stock price may be impacted by factors that are unrelated or disproportionate to our operating performance. These market fluctuations, as well as general economic, political and market conditions, such as recessions, interest rates or international currency fluctuations may adversely affect the market price of our common stock. Additionally, there could be extreme fluctuations in the price of our common stock.
We believe that our stock prices (bid, ask and closing prices) may not relate to the actual value of our company, and may not reflect the actual value of our common stock. Shareholders and potential investors in our common stock should exercise caution before making an investment in our common stock, and should not rely on the publicly quoted or traded stock prices in determining our common stock value, but should instead determine the value of our common stock based on the information contained in our public reports and industry information.
Cash flows for the threesix months ended March 31,June 30, 2022 compared to the threesix months ended March 31,June 30, 2021, were as follows:follows (in thousands):
| | | Three Months Ended March 31, | | Six Months Ended June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
Beginning cash, cash equivalents and restricted cash | Beginning cash, cash equivalents and restricted cash | | $ | 136,626,939 | | | $ | 10,995,169 | | Beginning cash, cash equivalents and restricted cash | | $ | 136,627 | | | $ | 10,995 | |
Net cash provided by (used in): | Net cash provided by (used in): | | | | | Net cash provided by (used in): | | | | |
Operating activities | Operating activities | | (3,989,799) | | | 2,189,096 | | Operating activities | | (88,194) | | | 5,045 | |
Investing activities | Investing activities | | (6,691,427) | | | (1,017,379) | | Investing activities | | (230,211) | | | (2,745) | |
Financing activities | Financing activities | | (1,398,463) | | | 359,943 | | Financing activities | | 279,792 | | | 1,772 | |
Net increase (decrease) in cash, cash equivalents and restricted cash | Net increase (decrease) in cash, cash equivalents and restricted cash | | (12,079,689) | | | 1,531,660 | | Net increase (decrease) in cash, cash equivalents and restricted cash | | (38,613) | | | 4,072 | |
Ending cash, cash equivalents and restricted cash | Ending cash, cash equivalents and restricted cash | | $ | 124,547,250 | | | $ | 12,526,829 | | Ending cash, cash equivalents and restricted cash | | $ | 98,014 | | | $ | 15,067 | |
The analysis of cash flow activities below and the table above, is combined for both continued and discontinued operations.operations, whereas the consolidated statement of cash flows included in this report.
Our primary sources of liquidity are cash flows from the Convertible Senior Notes and Term Loan.
Net cash used byin operating activities was $3,989,799approximately $88.2 million for the threesix months ended March 31,June 30, 2022, as compared to net cash provided by operating activities of $2,189,096$5.0 million during the corresponding period in 2021. The primary reason for the increase in cash used by operating activities for the threesix month period ended March 31,June 30, 2022, compared to the same period in 2021, was the businesses development expensesMobile Refinery inventory purchase of $68 million, $13.6 million of acquisition costs related to the Mobile Refinery Purchase Agreement,purchase, $65 million cash settlement on inventory hedging activities, and the cash paid for the termination of the Sales Agreement with Safety-Kleen in January 2022.
Investing activities used cash of $6,691,427approximately $230.2 million for the threesix months ended March 31,June 30, 2022, as compared to having used $1,017,379$2.7 million of cash during the corresponding period in 2021, due mainly to capital expenditures relating to our Alabamathe acquisition of Mobile Refinery plant.during the current period.
Financing activities usedprovided cash of $1,398,463approximately $279.8 million for the threesix months ended March 31,June 30, 2022, as compared to providing cash of $359,943$1.8 million during the corresponding period in 2021. Financing activities for the threesix months ended March 31,June 30, 2022 were comprised of proceeds from Term Loan and insurance premium finance of $166 million, from inventory financing of $173 million and from the exercise of options and warrants of $0.1$0.7 million offset by the payment on redemption of non-controlling interest of $51 million, distribution to noncontrolling interest of $0.4 million and payment on notes payable and capital leases of
$1.5 $8 million. Financing activities for the threesix months ended March 31,June 30, 2021 were comprised of proceeds from the exercise of options and warrants of $1.7$3 million and from line of credit proceeds of $1 million offset by the payment on notes payable and capital leases of $1.3$2 million.
More information regarding our loan agreements, leases, and Convertible Senior Notes, can be found under “Note 6. Financing Arrangements” to the unaudited financial statements included herein.
Critical Accounting Policies and Use of Estimates
Our financial statements are prepared in accordance with U.S. GAAP. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Management regularly evaluates its estimates and judgments, including those related to revenue recognition, intangible assets, long-lived assets valuation, variable interest entities, and legal matters. Actual results may differ from these estimates may be material. Note 2, “Summary of Critical Accounting Policies and Estimates” in Part I, Item 1 of this Quarterly Report on Form 10-Q and in the Notes to Consolidated Financial Statements in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Form 10-K”), and “Critical Accounting Policies and Estimates” in Part II, Item 7 of the 2021 Form 10-K describe the significant accounting policies and methods used in the preparation of the Company’s financial statements. There have been no material changes to the Company’s critical accounting policies and estimates since the 2021 Form 10-K. Market Risk
Our revenues and cost of revenues are affected by fluctuations in the value of energy related products. We attempt to mitigate much of the risk associated with the volatility of relevant commodity prices by using our knowledge of the market to obtain feedstock at attractive costs, by efficiently managing the logistics associated with our products, by turning our inventory over quickly and by selling our products into markets where we believe we can achieve the greatest value.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market Risk
Our revenues and cost of revenues are affected by fluctuations in the value of energy related products. We attempt to mitigate much of the risk associated with the volatility of relevant commodity prices by using our knowledge of the market to obtain feedstock at attractive costs, by efficiently managing the logistics associated with our products, by turning our inventory over quickly and by selling our products into markets where we believe we can achieve the greatest value.
Interest Rate Risk
We are exposed to interest rate risks primarily through borrowings under various bank facilities. Interest on these facilities is based upon variable interest rates using Prime as the base rate.
Commodity Price Risk
We are exposed to market risks related to the volatility of crude oil and refined oil products. Our financial results can be significantly affected by changes in these prices which are driven by global economic and market conditions. We attempt to mitigate much of the risk associated with the volatility of relevant commodity prices by using our knowledge of the market to obtain feedstock at attractive costs, by efficiently managing the logistics associated with our products, by turning our inventory over quickly, and by selling our products into markets where we believe we can achieve the greatest value.
Inflation Risk
Inflationary factors such as increases in the cost of our products and overhead costs may adversely affect our results of operations. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, we continue to monitor the impact of inflation in order to minimize its effects through price increases and cost reductions. A high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and selling, general, and administrative expenses as a percentage of net revenue if the selling prices of our products do not increase in proportion with these increased costs.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We have established and maintain a system of disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports filed with the SEC pursuant to the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Commission and that such information is accumulated and communicated to our management, including our Chief Executive Officer (CEO)(principal executive officer) and Chief Financial Officer (CFO) (principal accounting/financial officer), as appropriate, to allow timely decisions regarding required disclosures.
Management, with the participation of our CEO and CFO, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this report. As of March 31,June 30, 2022, 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, 2021 (as described in greater detail in our annual report on Form 10-K for the year ended December 31, 2021), our CEO and CFO have concluded that our disclosure controls and procedures were not effective to provide 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 properly, processed, summarized and reported within the time periods specified in the rules and forms of the Commission and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosures.
Remediation Efforts to Address Material Weakness
We believe the remedial measures described in Part II, “Item 9A, Controls and Procedures” in our Annual Report on Form 10-K for the year ended December 31, 2021, and others that may be implemented, will remediate this material weakness. However, this material weakness 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. We expect this to occur by the end of fiscal 2022.
Inherent Limitations over Internal Controls
Management, including the Company’s Chief Executive Officer and Chief Financial Officer, does not expect that the Company’s internal controls will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, any evaluation of the effectiveness of controls in future periods are subject to the risk that those internal controls may become inadequate because of changes in business conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Changes in Internal Control Over Financial Reporting
We regularly review our system of internal control over financial reporting to ensure we maintain an effective internal control environment. ThereWith the exception of our Mobile acquisition, which we are in the process of evaluating, there were no changes in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Qthree months ended June 30, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we may become party to litigation or other legal proceedings that we consider to be a part of the ordinary course of our business.
Such current litigation or other legal proceedings are described in, and incorporated by reference in, this “Item 1. Legal Proceedings” of this Form 10-Q from, “Part I” -“Item 1. Financial Statements” in the Notes to Consolidated Financial Statements in “Note 3. Concentrations, Significant Customers, 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.
Item 1A. 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, 2021, filed with the Commission on March 14, 2022 (the “Form 10-K”), under the heading “Risk Factors”, except as set forth below, and investors should review the risks provided in the Form 10-K (as modified as discussed below) and below, prior to making an investment in the Company. The business, financial condition and operating results of the Company can be affected by a number of factors, whether currently known or unknown, including but not limited to those described below and in the Form 10-K for the year ended December 31, 2021, under “Risk Factors”, 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.
Risks Relating to Our Need for Future Funding and Current Indebtedness
We will need to raise additional capital in the future and our ability to obtain the necessary funding is uncertain.
We will 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 and to repay the Term Loan, and to complete the transactions contemplated by the Heartland Purchase Agreement, which require us to pay approximately $44 million by June 30, 2022, and we may need to raise additional funding in the future to support our operations, complete acquisitions and grow our operations. If we raise additional funds in the future, by issuing equity securities, dilution to existing stockholders will result, and such securities may have rights, preferences and privileges senior to those of our common stock and preferred 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, complete planned acquisitions or operations, our results of operations and the value of our securities could be adversely affected. Future funding may not be available on favorable terms, if at all.
We have substantial indebtedness and plan to acquire additional indebtedness in the future, which could adversely affect our financial flexibility and our competitive position. Our future failure to comply with financial covenants in our debt agreements could result in such debt agreements again being declared in default.
Our substantial indebtedness could have important consequences and significant effects on our business. For example, it could:
•increase our vulnerability to adverse changes in general economic, industry and competitive conditions;
•require us to dedicate a substantial portion of our cash flow from operations to make payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes;
•restrict us from taking advantage of business opportunities;
•make it more difficult to satisfy our financial obligations;
•place us at a competitive disadvantage compared to our competitors that have less debt obligations; and
•limit our ability to borrow additional funds for working capital, capital expenditures, acquisitions, debt service requirements, execution of our business strategy or other general corporate purposes on satisfactory terms or at all.
We may need to raise additional funding in the future to repay or refinance the Convertible Senior Notes, the Term Loan, planned future borrowings and our accounts payable, and as such may need to seek additional debt or equity financing. Such additional financing may not be available on favorable terms, if at all. If debt financing is available and obtained, our interest expense may increase and we may be subject to the risk of default, depending on the terms of such financing. If equity financing is available
and obtained it may result in our stockholders experiencing significant dilution. If such financing is
unavailable, we may be forced to curtail our operations, which may cause the value of our securities to decline in value and/or become worthless.
The requirements, restrictions and covenants in our Loan and Security Agreement may restrict our ability to operate our business and might lead to a default under such agreement.
The Loan and Security Agreement includes customary representations and warranties, and affirmative and negative covenants of the Loan Parties for a facility of that size and type, including prohibiting the Loan Parties from creating any indebtedness without the consent of the Lenders, subject to certain exceptions, and requiring the Loan Parties to have no less than $17.5 million of unrestricted cash for more than three consecutive business days.
The Loan and Security Agreement includes customary events of default for transactions of that type, including failures to pay amounts due, bankruptcy proceedings, covenant defaults, attachment or seizure of a material portion of the collateral securing the Loan and Security Agreement, cross defaults, if there is a default in any agreement governing indebtedness in excess of $3,000,000, resulting in the right to accelerate such indebtedness, certain judgments against a Loan Party, misrepresentations by the Loan Parties in the transaction documents, insolvency, cross default of the Offtake and Supply Agreement, a Change of Control (discussed below), termination of certain intercreditor agreements, and the loss or termination of certain material contacts. Upon the occurrence of an event of default the Agent may declare the entire amount of obligations owed under the Loan and Security Agreement immediately due and payable and take certain other actions provided for under the Loan and Security Agreement, including enforcing security interests and guarantees.
Additionally, in the event of any payment, repayment or prepayment (other than with respect to a sale of the Company’s used motor oil assets or a change of control, and other than in connection with prepayments required to be made with funds received from insurance settlements and recoveries which are not subject to a prepayment premium), including in the event of acceleration of the Term Loan, certain asset sales (other than the used motor oil assets), certain equity issuances, and voluntary prepayments (a) during the first 18 months after the Closing Date, Vertex Refining agreed to pay an additional amount to the Lenders equal to 150% of the applicable interest rate, multiplied by the amount of such prepayment amount; (b) during the 19th through 24th months after the Closing Date, Vertex Refining agreed to pay an additional amount to the Lenders equal to 50% of the applicable interest rate, multiplied by the amount of such prepayment amount; and (c) at any time during the 25th month after the Closing Date, but prior to the date that is 90 days before the maturity date of amounts owed pursuant to the Loan and Security Agreement, Vertex Refining agreed to pay an additional amount to the Lenders equal to 25% of the applicable interest rate, multiplied by the amount of such prepayment amount. Upon the sale of the Company’s used motor oil assets (as discussed below), or the required repayment upon a change of control (also discussed below), Vertex Refining agreed to pay an additional amount to the Lenders equal to 1% of the aggregate principal amount of the amount prepaid (as applicable, the “Prepayment Premium”). The Prepayment Premium is also due upon a change of control, which includes the direct or indirect transfer of all or substantially all of the assets of the Loan Parties (defined below); the adoption of a plan of liquidation or dissolution relating to the Company; the acquisition in one or a series of transactions of 33% or more of the equity interests of the Company by a person or entity; the Company’s failure to own 100% of Vertex Refining and the other Loan Parties, unless permitted by the Lenders; during any period of twelve consecutive months commencing on or after the Closing Date, the occurrence of a change in the composition of the Board of Directors of the Company such that a majority of the members of such Board of Directors are no longer directors; or a “change of control” or any comparable term under, and as defined in, any other indebtedness exceeding $2 million of the Loan Parties, shall have occurred (each a “Change of Control”).
As a result of these requirements, covenants and limitations, we may not be able to respond to changes in business and economic conditions and to obtain additional financing, if needed, and we may be prevented from engaging in transactions that might otherwise be beneficial to us. The breach of any of these requirements or covenants could result in a default under the Loan and Security Agreement or future credit facilities. Upon the occurrence of an event of default, the lenders could elect to declare all amounts outstanding under such Loan and Security Agreement or future debt facilities, including accrued interest or other obligations, to be immediately due and payable. If amounts outstanding under such Loan and Security Agreement or future debt facilities were to be accelerated, our assets might not be sufficient to repay in full that indebtedness and our other indebtedness.
Our Loan and Security Agreement and Supply and Offtake Agreement also contain cross-default and cross-acceleration provisions as may our future debt facilities. Under these provisions, a default or acceleration under one instrument governing our debt will in the case of the Loan and Security Agreement and Supply and Offtake Agreement and may in the case of future indebtedness, constitute a default under our other debt instruments that contain cross-default and cross-acceleration provisions, which could result in the related debt and the debt issued under such other instruments becoming immediately due and payable. In such event, we would need to raise funds from alternative sources, which funds might not be available to us on favorable terms, on a timely basis or at all. Alternatively, such a default could require us to sell assets and otherwise curtail
operations to pay our creditors. The proceeds of such a sale of assets, or curtailment of operations, might not enable us to pay all of our liabilities.
A prolonged period of weak, or a significant decrease in, industry activity and overall markets, due to COVID-19 or otherwise, may make it difficult to comply with our covenants and the other restrictions in the agreements governing our debt and current global and market conditions have increased the potential for that difficulty.
Our ability to service our indebtedness will depend on our ability to generate cash in the future.
Our ability to make payments on our current (including our Convertible Senior Notes and Loan and Security Agreement)Term Loan) and future indebtedness will depend on our ability to generate cash in the future. Our ability to generate cash is subject to general economic and market conditions and financial, competitive, legislative, regulatory and other factors that are beyond our control. Our business may not generate sufficient cash to fund our working capital requirements, capital expenditures, debt service and other liquidity needs, which could result in our inability to comply with financial and other covenants contained in our debt agreements, our being unable to repay or pay interest on our indebtedness, and our inability to fund our other liquidity needs. If we are unable to service our debt obligations, fund our other liquidity needs and maintain compliance with our financial and other covenants, we could be forced to curtail our operations, our creditors could accelerate our indebtedness and exercise other remedies and we could be required to pursue one or more alternative strategies, such as selling assets or refinancing or restructuring our indebtedness. However, such alternatives may not be feasible or adequate.
Our obligations under the Loan and Security Agreement and Supply and Offtake Agreement are secured by a first priority security interest in substantially all of our assets and various Company guarantees.
The amounts borrowed pursuant to the terms of the Loan and Security Agreement are secured by substantially all of the present and after-acquired assets of the Company and its subsidiaries. Additionally, Vertex Refining’s obligations under the Loan and Security Agreement are jointly and severally guaranteed by substantially all of the Company’s subsidiaries and the Company (collectively, Vertex Refining, the Company and the Company’s subsidiaries which have guaranteed Vertex Refining’s obligations under the Loan and Security Agreement, the “Loan Parties”).Company. The amounts owed under the Loan and Security Agreement are also secured by various deeds of trusts and mortgages for the real property(s) described therein, over the Mobile Refinery and substantially all other material owned and leased real property of the Guarantors including properties in Texas and Louisiana. In connection with the entry into the Loan and Security Agreement, Vertex Operating, entered into an Intellectual Property Security Agreement in favor of the Agent, pursuant to which it granted a security interest in substantially all of its intellectual property (including patents and trademarks) in favor of the Lenders to secure the obligations of the Loan Parties under the Loan and Security Agreement. In connection with the entry into the Loan and Security Agreement, the Company, Vertex Refining and each of the Guarantors, entered into a Collateral Pledge Agreement in favor of the Agent, pursuant to which they granted the Agent a security interest in all now owned or hereafter acquired promissory notes and instruments evidencing indebtedness to any Guarantor and all now owned or hereafter acquired equity interests owned by such Guarantor.
The obligations of Vertex Refining and any of its subsidiaries under the Supply and Offtake Agreement and related transaction documents are guaranteed by the Company. The obligations of Vertex Refining and any of its subsidiaries under the Supply and Offtake Agreement and related transaction documents are also secured by a Pledge and Security Agreement in favor of Macquarie, discussed below, executed by Vertex Refining. In addition, the Supply and Offtake Agreement also requires that Vertex Refining post and maintain cash collateral (in the form of an independent amount) as security for Vertex Refining’s obligations under the Supply and Offtake Agreement and the related transaction documents. The amount of cash collateral is subject to adjustments during the term.
As a result of the above, our creditors and Macquarie, in the event of the occurrence of a default under the Loan and Security Agreement or Supply and Offtake Agreement, respectively, may enforce their security interests over our assets and/or our subsidiaries which secure such obligations, take control of our assets and operations, force us to seek bankruptcy protection, or force us to curtail or abandon our current business plans and operations. If that were to happen, any investment in the Company (including, but not limited to any investment in our common stock) could become worthless.
Our arrangement with Macquarie exposes us to Macquarie-related credit and performance risk as well as potential refinancing risks.
In April 2021,2022, we entered into several agreements with Macquarie as discussed above under “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” – “Recent Events”, to support the operations of the Mobile Refinery. Pursuant to the Supply and Offtake Agreement, Macquarie has agreed to intermediate crude oil supplies and refined product inventories at the Mobile Refinery. Macquarie will own all of the crude oil in our tanks and substantially all of our refined product inventories prior to our sale of the inventories.
Should Macquarie terminate the Supply and Offtake Agreement with 180 days written notice, we would need to seek alternative sources of financing, including the requirement upon termination to repurchase the inventory at then current market prices. In addition, the cost of repurchasing the inventory may be at higher prices than we sold the inventory. If the price of crude oil is well above the price at which we sold the inventory, we would have to pay more for the inventory than the price we sold the inventory for. If this is the case at the time of termination, we could suffer significant reductions in liquidity when Macquarie terminates the Supply and Offtake AgreementsAgreement and we have to repurchase the inventories. We may also be unable to enter into a similar relationship with a third party which may impair our ability to operate the Mobile Refinery and purchase inventory therefore, which could have a material adverse effect on our operations and cash flows.
If we are unable to obtain crude oil supplies for our Mobile Refinery without the benefit of certain intermediation agreements, the capital required to finance our crude oil supply could negatively impact our liquidity.
All of the crude oil delivered at our Mobile Refinery is subject to our Supply and Offtake Agreements with Macquarie. If we are unable to obtain our crude oil supply for our refinery under these agreements, our exposure to crude oil pricing risks may increase as the number of days between when we pay for the crude oil and when the crude oil is delivered to us increases. Such increased exposure could negatively impact our liquidity position due to the increase in working capital used to acquire crude oil inventory for our refineries.
The Intermediation Agreements expose us to counterparty credit and performance risk.
We have Supply and Offtake Agreements with Macquarie, pursuant to which Macquarie will intermediate crude oil supplies and refined product inventories at our Mobile Refinery. Macquarie will own all of the crude oil in our tanks and substantially all of our refined product inventories prior to our sale of the inventories. Upon termination of the Supply and Offtake Agreements, unless extended by mutual agreement for an additional one year term, we are obligated to repurchase all crude oil and refined product inventories then owned by Macquarie and located at the specified storage facilities at then current market prices. This repurchase obligation could have a material adverse effect on our business, results of operations, or financial condition. An adverse change in the business, results of operations, liquidity, or financial condition of our intermediation counterparties could adversely affect the ability of such counterparties to perform their obligations, which could consequently have a material adverse effect on our business, results of operations, or liquidity and, as a result, our business and operating results.
An increase in interest rates will cause our debt service obligations to increase.
The amounts borrowed under the Loan and Security Agreement will bear interest at a rate per annum equal to the sum of (i) the greater of (x) the per annum rate publicly quoted from time to time by The Wall Street Journal as the “Prime Rate” in the United States minus 1.50% as in effect on such day and (y) the Federal Funds rate for such day plus 0.50%, subject in the case of this clause (i), to a floor of 1.0%, plus (ii) 9.25%, which rate is currently 10.25%. As such an increase in the interest rates associated with our floating-rate debt would increase our debt service costs and affect our results of operations. In addition, an increase in interest rates could adversely affect our future ability to obtain financing or materially increase the cost of any additional financing.
Economic uncertainty may affect our access to capital and/or increase the costs of such capital.
Global economic conditions continue to be volatile and uncertain due to, among other things, consumer confidence in future economic conditions, fears of recession and trade wars, global conflicts, including the ongoing conflict between Russia and Ukraine, the price of energy, fluctuating interest rates, the availability and cost of consumer credit, the availability and timing of government stimulus programs, levels of unemployment, increased inflation, and tax rates. These conditions remain unpredictable and create uncertainties about our ability to raise capital in the future. In the event required capital becomes unavailable in the future, or more costly, it could have a material adverse effect on our business, results of operations, and financial condition.
Risks Relating to Our Operations, Business and Industry
Unanticipated problems at, or downtime effecting, our facilities and those operated by third parties on which we rely, could have a material adverse effect on our results of operations.
Our ability to process feedstocks depends on our ability to operate our refining/processing operations and facilities, including our newly acquired Mobile Refinery, and those operated by third parties on which we rely, including, but not limited to Monument Chemical, and the total time that such facilities are online and operational. The occurrence of significant
unforeseen conditions or events in connection with the operation or maintenance of such facilities, such as the need to refurbish such facilities, complete capital projects at such facilities, shortages of workers or materials, adverse weather, including, but not limited to lightning strikes, floods, hurricanes, tornadoes and earthquakes, equipment failures, fires, explosions, oil or other leaks, damage to or destruction of property and equipment associated therewith, environmental releases and/or damage, government regulation changes affecting the use of such facilities, terrorist attacks, mechanical or physical failures of
equipment, acts of God, or other conditions or events, could prevent us from operating our facilities, or prevent such third parties from operating their facilities, or could force us or such third parties to shut such facilities down for repairs, maintenance, refurbishment or upgrades for a significant period of time. In the event any of our facilities or those of third parties on which we rely are offline for an extended period of time, it could have a material adverse effect on our results of operations and consequently the price of our securities. For example, on October 7, 2020, we had a fire at our Marrero refinery which took the facility offline for repairs for about two weeks. The refinery suffered some minor structural damage along with piping, valves and instrumentation in the immediate area of the fire, the largest impact was the damage to the electrical conduit that feeds the power to the refinery equipment and was back up October 26, 2020. Additionally, during August and September 2020, two hurricanes brought severe flooding and high winds that adversely impacted operations in the Gulf Coast and, specifically at the Company’s Marrero, Louisiana refinery, while also limiting outbound shipments of finished product along adjacent waterways between Houston and New Orleans for approximately two weeks. Additionally, during August 2021, Hurricane Ida made landfall in southeast Louisiana, approximately 30 miles directly south and west of the Myrtle Grove facility, which resulted in the entire 42 acre Myrtle Grove site to be covered with 4-6 feet of storm surge and thus damages of assets and equipment. The Company reviewed the inspection report and related information from insurance companies and a third party engineer, and determined that there is no 100% certainty around the recoverability of some Construction-In-Progress assets such as fire heaters and pumps and instrumentation. The Company recorded $2.1 million of loss on assets impairment on the Consolidated Statements of Operations in the fourth quarter of 2021, of which the entire amount is related to our Black Oil segment. Subsequent downtime at our facilities, including our newly acquired Mobile Refinery, losses of equipment or use of such facilities may have a material adverse effect on our operations, cash flows or assets. The Company believes that it maintains adequate insurance coverage.
Unanticipated problems or delays, or increases in costs, in connection with the plannedongoing capital project at the newly acquired Mobile Refinery may harm our business and viability.
We plan to completeare in the process of completing an $85 million capital project designed to modify the Mobile Refinery’s hydrocracking unit to produce renewable diesel fuel on a standalone basis (the “Conversion”). The occurrence of significant unforeseen conditions or events in connection with the Conversion may make the Conversion more expensive, prevent us from completing the Conversion, delay the completion of the Conversion or require us to reexamine our business model. Any change to our business model or management’s evaluation of the viability of the Conversion or timing associated therewith may adversely affect our business. Construction costs for the Conversion may also increase to a level that would make such Conversion too expensive to complete or unprofitable to operate.operate, due to increases in material, labor, inflation 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, any of which could prevent us from timely completing the Conversion.
We may be unable to sell our UMO Business.
Our agreement with Safety-Kleen to acquire our UMO Business was terminated in January 2022. We are continuing to seek sales opportunities relating to such UMO Business, but we may be unable to find a purchaser to purchase such UMO Business on as favorable terms as Safety-Kleen had previously agreed to acquire such assets, such sale may be unable to be completed due to required conditions to closing, including governmental regulations, and the knowledge that we are actively trying to sell our UMO Business may result in depressed prices. As a result, we may not be able to sell our UMO Business on favorable terms, if at all and/or may face termination and other fees in connection with any planned sale which is subsequently abandoned.
Claims above our insurance limits, or significant increases in our insurance premiums, may reduce our profitability.
We currently employ approximately 5792 full-time drivers. From time to time, some of these employee drivers are involved in automobile accidents. We currently carry liability insurance of $1,000,000 for our drivers, subject to applicable deductibles, and carry umbrella coverage up to $25,000,000. We currently employ over 200450 employees. Claims against us may exceed the amounts of available insurance coverage. If we were to experience a material increase in the frequency or severity of accidents, liability claims or workers’ compensation claims or unfavorable resolutions of claims, our operating results could be materially affected.
Our hedging activities have in the past and may in the future prevent us from benefiting fully from increases in oil prices and may expose us to other risks, including counterparty risk.
We use derivative instruments to hedge the impact of fluctuations in oil and other prices on our results of operations and cash flows. Toflows and are also required to use such hedges pursuant to the terms of the Loan and Security Agreement. We have in the past, and to the extent that we continue to engage in hedging activities to protect ourselves against commodity price declines, we may be prevented from fully realizing the benefits of increases in oil prices above the prices established by our hedging contracts. In addition,contracts and/or may result in us paying more for oil feedstocks then we receive upon the sale of finished products as we hedge finished product sales and not feedstock purchases. For example, as of June 30, 2022, our outstanding oil hedges had a fair value of negative $46,537,144. Our hedging activities may expose us to the risk of financial loss in certain circumstances, including instances in which the counterparties to our hedging contracts fail to perform under the contracts. Finally, we are subject to risks associated with the adoption of derivatives legislation and regulations related to derivative contracts which if adopted, could have an adverse impact on our ability to hedge risks associated with our business. If regulations adopted in the future require that we post margin for our hedging activities or require our counterparties to hold margin or maintain capital levels, the cost of which could be passed through to us, or impose other requirements that are more burdensome than current regulations, hedging transactions in the future would become more expensive than we experienced in the past.
Completion of the acquisition of Heartland SPV is subject to certain conditions, and if these conditions are not satisfied or waived, the acquisition will not be completed.
The obligations of the parties to the Heartland Purchase Agreement is subject to satisfaction or waiver (if permitted) of a number of conditions. The satisfaction of all of the required conditions could delay the completion of the transaction for a significant period of time or prevent it from occurring. Any delay in completing the acquisition could cause the Company not to realize some or all of the benefits that the Company expects to achieve if the acquisition is successfully completed within its expected time frame. Further, there can be no assurance that the conditions to the closing of the acquisition will be satisfied or waived or that the acquisition will be completed.
Significant costs are expected to be incurred in connection with the integration of the Company and the Mobile Refinery into a single business, including legal, accounting, financial advisory and other costs.
The Company has already and expects to continue to incur significant costs in connection with integrating the Mobile Refinery operations. These costs may include costs for:
• employee redeployment, relocation or severance;
• integration of information systems; and
• reorganization or closures of facilities.
In addition, the Company expects to incur a number of non-recurring costs associated with combining the operations of the Mobile Refinery, which cannot be estimated accurately at this time. The Company has also incurred transaction fees and other costs related to the Mobile Refinery acquisition. Although we expect that the elimination of duplicative costs, as well as the realization of other efficiencies related to the integration of the businesses, may offset incremental transaction and transaction-related costs over time, this net benefit may not be achieved Our hedges have in the near term, or at all. There can be no assurance thatpast and may in the Company will be successful in these integration efforts.
Combining the Mobile Refinery and the Company may be more difficult, costly or time-consuming than expected and the Company may fail to realize the anticipated benefits of the acquisition of the Mobile Refinery, including expected financial and operating performance of the Company.
The success of the acquisition of the Mobile Refinery will depend, in part, on the Company’s ability to realize anticipated cost savings from combining the businesses of the Company and the Mobile Refinery. To realize the anticipated benefits and cost savings from the Mobile Refinery acquisition, the Company must successfully integrate and combine the business of the Mobile Refinery in a manner that permits those cost savings to be realized. If the Company is not able to successfully achieve this objective, the anticipated benefits of the Mobile Refinery may not be realized fully or at all or may take longer to realize than expected.
It is possible that the integration process couldfuture result in significant losses and reduce the lossamount of key employees,revenue we would otherwise obtain upon the disruptionsale of our ongoing businesses or inconsistencies in standards, controls, proceduresfinished products and policies that adversely affect our ability to maintain relationships with customers, suppliers and employees or to achieve the anticipated benefits and cost savings. Integration efforts may also divert management attentionincrease our margins and resources. These integration matters could have an adverse effect on each of the
Company and the Mobile Refinery during this transition period and for an undetermined period after completion of the acquisition of the Mobile Refinery.
Moving forward, we plan to transition the majority ofdecrease our business operations to those of the Mobile Refinery.
Following the closing of the Mobile Refinery acquisition, which closed on April 1, 2022, we anticipate that the more significant portion of our assets and operations will be related to such Mobile Refinery. Our change in business structure may not be successful. Additionally, our directors and officers may not be able to properly manage our new direction. If our new management fails to properly manage and direct our operations, we may be forced to scale back or abandon our planned operations, which may cause the value of our securities to decline or become worthless.net revenues.
We depend on certain third-party pipelines for transportation of feedstocks and products, and if these pipelines become unavailable to us, our revenues and cash available for payment of our debt obligations could decline.
Our Mobile Refinery is interconnected to a pipeline that supplies a portion of its crude oil feedstock. Since we do not own or operate this pipeline, its continuing operation is not within our control. The unavailability of any third-party pipelines for the transportation of crude oil or finished products, because of acts of God, accidents, earthquakes or hurricanes, government regulation, terrorism or other third-party events, could lead to disputes or litigation with certain of our suppliers or a decline in our sales, net income and cash available for payments of our debt obligations.
We make capital expenditures in our facilities to maintain their reliability and efficiency. If we are unable to complete capital projects at their expected costs and/or in a timely manner, or if the market conditions assumed in our projected economics deteriorate, results of operations or cash flows could be adversely affected.
Delays or cost increases related to the engineering, procurement and construction of new facilities, or improvements and repairs to our existing facilities and equipment, could have a material adverse effect on our business, financial condition, results of operations or our ability to make payments on our debt obligations. Such delays or cost increases may arise as a result of unpredictable factors in the marketplace, many of which are beyond our control, including:
• denial or delay in obtaining regulatory approvals and/or permits;
• changes in government regulations, including environmental and safety regulations;
• unplanned increases in the cost of equipment, materials or labor;
• disruptions in transportation of equipment and materials;
• severe adverse weather conditions, natural disasters or other events (such as equipment malfunctions, explosions, fires or spills) affecting our facilities, or those of our vendors and suppliers;
• shortages of sufficiently skilled labor, or labor disagreements resulting in unplanned work stoppages;
• market-related increases in a project’s debt or equity financing costs; and/or
• nonperformance or declarations of force majeure by, or disputes with, our vendors, suppliers, contractors or sub-contractors.
Equipment, even if properly maintained, may require significant capital expenditures and expenses to keep it operating at optimum efficiency.
Any one or more of these occurrences noted above could have a significant impact on our business or subject us to significant cost overruns. If we were unable to make up the delays or to recover the related costs, or if market conditions change, we may not realize the anticipated benefits of our capital projects and it could materially and adversely affect our financial position, results of operations or cash flows and, as a result, our ability to make payments of our debt obligations.
From time to time, we may seek to divest portions of our business, which could materially affect our results of operations and result in disruption to other parts of the business.
We may dispose of portions of our current business or assets (including, but not limited to our UMUMO Business, which we are actively seeking to divest), based on a variety of factors and strategic considerations, consistent with our strategy of preserving liquidity and streamlining our business to better focus on the advancement of our core business. We expect that any potential divestitures of assets will also provide us with cash to reinvest in our business and repay indebtedness. These dispositions, together with any other future dispositions we make, may involve risks and uncertainties, including disruption to other parts of our business, potential loss of employees, customers or revenue, exposure to unanticipated liabilities or result in ongoing obligations and liabilities to us following any such divestiture. In addition, any such divestitures may not yield the targeted improvements in our business. Any of the foregoing could adversely affect our financial condition and results of operations or cash flows and, as a result, our ability to make payments of our debt obligations.
Risks RelatingThe prices of crude oil and refined and finished lubricant products materially affect our profitability, and are dependent upon many factors that are beyond our control, including general market demand and economic conditions, seasonal and weather-related factors, regional and grade differentials and governmental regulations and policies.
Among these factors is the demand for crude oil and refined and finished lubricant products, which is largely driven by the conditions of local and worldwide economies, as well as by weather patterns, changes in consumer preferences and the taxation of these products relative to other energy sources. Governmental regulations and policies, particularly in the areas of taxation, energy and the environment, and more recently in response to the COVID-19 pandemic, also have a significant impact on our activities. Operating results can be affected by these industry factors, product and crude pipeline capacities, crude oil differentials (including regional and grade differentials), changes in transportation costs, accidents or interruptions in transportation, competition in the particular geographic areas that we serve, global market conditions, actions by foreign nations and factors that are specific to us, such as the efficiency of our refinery operations. The demand for crude oil and refined and finished lubricant products can also be reduced due to a Pending Acquisitionlocal or national recession or other adverse economic condition, which results in lower spending by businesses and consumers on gasoline and diesel fuel, higher gasoline prices due to higher crude oil prices, a shift by consumers to more fuel-efficient vehicles or alternative fuel vehicles (such as ethanol or wider adoption of gas/electric hybrid vehicles), or an increase in vehicle fuel economy, whether as a result of technological advances by manufacturers, legislation mandating or encouraging higher fuel economy or the use of alternative fuel.
We need to raise significant additional capital to completedo not produce crude oil and must purchase all our crude oil, the planned acquisition of assets and operations from Tensile-Vertex, and in the event we fail to complete such transactions, our interests in Heartland SPV may be liquidated.
On February 25, 2022, Vertex Splitter entered into a Purchase and Sale Agreement with Tensile-Vertex and Tensile-Heartland. Tensile-Heartland holds 65% of Heartland SPV, and Tensile-Vertex holds 100% of Tensile-Heartland.
Pursuant to the Heartland Purchase Agreement, the Company, through Vertex Splitter, agreed to acquire 100% of the outstanding securities of Tensile-Heartland, the resultprice of which will be that Vertex Splitter will own 100% of Heartland SPV.
Pursuant to the Heartland Purchase Agreement, the purchase price payable by Vertex Splitter to Vertex-Tensile, for 100% of Tensile-Heartland is $35 million (the “Base Amount”), plus an amount accruedfluctuates based upon worldwide and accruing from and after May 31, 2021,local market conditions. Our profitability depends largely on the Base Amount on a daily basis atspread between market prices for refined petroleum products and crude oil prices. This margin is continually changing and may fluctuate significantly from time to time. Crude oil and refined products are commodities whose price levels are determined by market forces beyond our control. For example, the ratereversal of 22.5% per annum compounded oncertain existing pipelines or the last dayconstruction of each calendar quarter plus an amount equalcertain new pipelines transporting additional crude oil or refined products to any and all cash and cash equivalents of Tensile-Heartland, as ofmarkets that serve competing refineries could affect the closing date, which we currently anticipate will total an aggregate of approximately $44 million. The purchase contemplated by the Heartland Purchase Agreement is requiredmarket dynamic that has allowed us to take place on June 30, 2022,advantage of favorable pricing. A deterioration of crack spreads or earlier as mutually agreed by the parties, subject to customary conditions to closing. The Heartland Purchase Agreement includes customary representations of the parties, requires the parties to bear their own feesprice differentials between domestic and expenses, except that each party is required to pay the fees and expenses of the other party upon termination of the agreement in certain situations; includes customary indemnification obligations; and includes mutual releases of the parties, effective upon closing. The Heartland Purchase Agreement may be terminated prior to closing, by the mutual consent of the parties; by Vertex Splitter if Vertex-Tensile has failed to consummate the agreement, or breached a covenant, representation or warranty set forth in the agreement, that prevents such closing, and such breach is not cured, if capable of being cured, within 30 days after notice thereof; by Vertex-Tensile if Vertex Splitter has failed to consummate the agreement, or breached a covenant, representation or warranty set forth in the agreement, that prevents such closing, and such breach is not cured, if capable of being cured, within 30 days after notice thereof; or by either party if there is a final, non-appealable judgment preventing the closing.
Pursuant to a Side Letter, in the event that (i) the closing of the transactions contemplated by the Myrtle Grove Purchase Agreement did not occur on or prior to March 31, 2022 (which transaction was completed on April 1, 2022, and which failure to close by March 31, 2022, was waived by Vertex-Tensile), and/or (ii) the closing of the transactions contemplated by the Heartland Purchase Agreement does not occur on or prior to June 30, 2022, then, in addition to any of the rights of Tensile-Vertex under the Heartland Purchase Agreement: (a) the Vertex Parties will use their best efforts to cause the closings under the Heartland Purchase Agreement to occur, including without limitation by raising debt financing, selling equity in a private or public transaction, selling assets and/or otherwise doing all things necessary or appropriate to raise the funds necessary to make the payments required to be made by Vertex Splitter Corporation ("Vertex Splitter") under the Heartland Purchase Agreement, in each case on commercially reasonable terms and conditions, subject to certain exceptions; (b) upon the written election of Tensile-Vertex, the Vertex Parties will and will cause their affiliates to consent to the distribution or other payment of any and all cash and cash equivalents of Heartland SPV (including any proceeds from the repayment of that certain $7,000,000 promissory note, issued by Vertex Operating to Heartland SPV on July 1, 2021, as amended to date and any direct and indirect subsidiaries to Tensile-Vertex, with such distribution or other payment to be structured as specified by Tensile-Vertex so as to be tax efficient for Tensile-Vertex; and (c) Tensile-Vertex may, with written notice, cause Heartland SPV to initiate a process intended to result in a sale of Heartland SPV, with Tensile-Vertex being entitled, upon the consummation of such sale, of the greater of (i) 65% of the total net equity proceeds of such sale, and (ii) the amount due to Tensile-Vertex under the Heartland Purchase Agreement as of the date of the consummation of such sale.
We will need to raise significant additional capital to close the acquisition contemplated by the Heartland Purchase Agreement, which funding may not be available on favorable terms, if at all. If we raise such funding through the sale of debt, we may be required to pay significant interest or other amounts on such debt, and/or be subject to material covenants. If we
raise such funding through the sale of equity, it may create significant dilution to existing shareholders. In the event we fail to close the transactions contemplated by the Heartland Purchase Agreement within the required timeline, Heartland SPV or its assets may be liquidated, which would mean we would not have rights or ownership of such assets, and the sales price of Heartland SPV and/or its assets may be depressed at the time of sale, each of which mayforeign crude oils could have a material adverse effect on our assets,business, financial condition, results of operations and cash flows.
Additionally, due to the seasonality of refined products markets and refinery maintenance schedules, results of operations for any particular quarter of a fiscal year are not necessarily indicative of results for the full year and can vary year to year in the event of unseasonably cool weather in the summer months and/or unseasonably warm weather in the winter months in the markets in which we sell our petroleum products. In general, prices for refined products are influenced by the price of crude oil. Although an increase or decrease in the price for crude oil may result in a similar increase or decrease in prices for refined products, there may be a time lag in the realization of the similar increase or decrease in prices for refined products. The effect of changes in crude oil prices on operating results, therefore, depends in part on how quickly refined product prices adjust to reflect these changes. A substantial or prolonged increase in crude oil prices without a corresponding increase in refined
product prices, a substantial or prolonged decrease in refined product prices without a corresponding decrease in crude oil prices, or a substantial or prolonged decrease in demand for refined products could have a significant negative effect on our earnings and cash flow. Also, our crude oil and refined products inventories are valued at the lower of cost or market under the last-in, first-out (“LIFO”) inventory valuation methodology, excluding commodity inventories at the Mobile Refinery which use the weighted average inventory accounting method. If the market value of our inventory were to decline to an amount less than our LIFO cost, we would record a write-down of inventory and a non-cash charge to cost of products sold even when there is no underlying economic impact at that point in time. Continued volatility in crude oil and refined products prices could result in lower of cost or market inventory charges in the future, or in reversals reducing cost of products sold in subsequent periods should prices recover.
To successfully operate our facilities, we are required to expend significant amounts for capital outlays and operating expenditures. If we are unable to complete capital projects at their expected costs or in a timely manner, or if the market conditions assumed in our project economics deteriorate, our financial condition, results of operations, or prospects.cash flows could be materially and adversely affected.
Our facilities consist of many processing units, a number of which have been in operation for many years. One or more of the units may require unscheduled downtime for unanticipated maintenance or repairs that are more frequent than our scheduled turnaround for such units. Scheduled and unscheduled maintenance could reduce our revenues during the period of time that the units are not operating. The installation and redesign of key equipment at our facilities, including the planned construction of the renewable diesel capital project at the Mobile Refinery, involves significant uncertainties, including the following: our upgraded equipment may not perform at expected levels; operating costs of the upgraded equipment may be higher than expected; the yield and product quality of new equipment may differ from design and/or specifications and redesign, modification or replacement of the equipment may be required to correct equipment that does not perform as expected, which could require facility shutdowns until the equipment has been redesigned or modified. Any of these risks associated with new equipment, redesigned older equipment, or repaired equipment could lead to lower revenues or higher costs or otherwise have a negative impact on our future financial condition and results of operations.
One of the ways we may grow our business is through the construction of new refinery processing units (or the purchase and refurbishment of used units from another refinery) and the conversion or expansion of existing ones, such as the ongoing conversion at the Mobile Refinery to produce renewable biodiesel. Projects are generally initiated to increase the yields of higher-value products, increase the amount of lower cost crude oils that can be processed, increase refinery production capacity, meet new governmental requirements or take advantage of new government incentive programs, or maintain the operations of our existing assets. Additionally, our growth strategy includes projects that permit access to new and/or more profitable markets, including the growing demand for renewable diesel. The construction process involves numerous regulatory, environmental, political, and legal uncertainties, most of which are not fully within our control, including:
•third party challenges to, denials, or delays with respect to the issuance of requisite regulatory approvals and/or obtaining or renewing permits, licenses, registrations and other authorizations;
•societal and political pressures and other forms of opposition;
•compliance with or liability under environmental regulations;
•unplanned increases in the cost of construction materials or labor;
•disruptions in transportation of modular components and/or construction materials;
•severe adverse weather conditions, natural disasters, terror or cyberattacks, vandalism or other events (such as equipment malfunctions, explosions, fires or spills) affecting our facilities, or those of vendors and suppliers;
•shortages of sufficiently skilled labor, or labor disagreements resulting in unplanned work stoppages;
•market-related increases in a project’s debt or equity financing costs; and/or
•nonperformance or force majeure by, or disputes with, vendors, suppliers, contractors, or sub-contractors involved with a project.
If we are unable to complete capital projects at their expected costs or in a timely manner our financial condition, results of operations, or cash flows could be materially and adversely affected.Delays in making required changes or upgrades
to our facilities could subject us to fines or penalties as well as affect our ability to supply certain products we make. In addition, our revenues may not increase immediately upon the expenditure of funds on a particular project. For instance, the construction of our previously announced renewable diesel capital project at the Mobile Refinery will occur over an extended period of time and we will not receive any material increases in revenues until after completion of the project. Moreover, we may construct facilities to capture anticipated future growth in demand for refined products or renewable diesel in a region in which such growth does not materialize. As a result, new capital investments may not achieve our expected investment return, which could adversely affect our financial condition or results of operations.
In addition, we expect to execute turnarounds at our refineries, which involve numerous risks and uncertainties. These risks include delays and incurrence of additional and unforeseen costs. The turnarounds allow us to perform maintenance, upgrades, overhaul and repair of process equipment and materials, during which time all or a portion of the refinery will be under scheduled downtime.
Our forecasted internal rates of return are also based upon our projections of future market fundamentals which are not within our control, including changes in general economic conditions, available alternative supply, global market conditions, actions by foreign nations and customer demand.
Competition in the refining industry is intense, and an increase in competition in the markets in which we sell our products could adversely affect our earnings and profitability.
We compete with a broad range of refining companies, including certain multinational oil companies. Because of their geographic diversity, larger and more complex refineries, integrated operations and greater resources, some of our competitors may be better able to withstand volatile market conditions, to obtain crude oil in times of shortage and to bear the economic risks inherent in all areas of the refining industry.
We are not engaged in petroleum exploration and production activities and do not produce any of the crude oil feedstocks used at our refineries. We do not have a retail business and therefore are dependent upon others for outlets for our refined products. Certain of our competitors, however, obtain a portion of their feedstocks from company-owned production and have retail outlets. Competitors that have their own production or extensive retail outlets, with brand-name recognition, are at times able to offset losses from refining operations with profits from producing or retailing operations, and may be better positioned to withstand periods of depressed refining margins or feedstock shortages.
In recent years there have been several refining and marketing consolidations or acquisitions between entities competing in our geographic market. These transactions could increase the future competitive pressures on us.
The markets in which we compete may be impacted by competitors’ plans for expansion projects and refinery improvements that could increase the production of refined products in our areas of operation and significantly affect our profitability.
Also, the potential operation of new or expanded refined product transportation pipelines, or the conversion of existing pipelines into refined product transportation pipelines, could impact the supply of refined products to our existing markets and negatively affect our profitability.
In addition, we compete with other industries that provide alternative means to satisfy the energy and fuel requirements of our industrial, commercial and individual consumers. The more successful these alternatives become as a result of governmental regulations, technological advances, consumer demand, improved pricing or otherwise, the greater the impact on pricing and demand for our products and our profitability. There are presently significant governmental and consumer pressures to increase the use of alternative fuels in the United States.
The market for our lubricants is highly competitive and requires us to continuously develop and introduce new products and product enhancements.
Our ability to grow our lubricants depends, in part, on our ability to continuously develop, manufacture and introduce new products and product enhancements on a timely and cost-effective basis, in response to customers’ demands for higher performance process lubricants and other product offerings. Our competitors may develop new products or enhancements to their products that offer performance, features and lower prices that may render our products less competitive or obsolete, and, as a consequence, we may lose business and/or significant market share. Our efforts to respond to changes in consumer demand in a timely and cost-efficient manner to drive growth could be adversely affected by unfavorable margins or difficulties or delays in product development and service innovation, including the inability to identify viable new products, successfully
complete research and development, obtain regulatory approvals, obtain intellectual property protection or gain market acceptance of new products or service techniques. The development and commercialization of new products requires significant expenditures over an extended period of time, and some products that we seek to develop may never become profitable, and we could be required to write-off our investments related to a new product that does not reach commercial viability.
A material decrease in the supply, or a material increase in the price, of crude oil or other raw materials or equipment available to our refineries and other facilities could significantly reduce our production levels and negatively affect our operations.
To maintain or increase production levels at our refineries, we must continually contract for crude oil supplies from third parties. There are a limited number of crude oil suppliers in certain geographic regions, and in such cases, we may be required to source from more than one supplier. If we are unable to maintain or extend our existing contracts with any such crude oil suppliers, or enter into new agreements on similar terms, the supply of crude oil could be adversely impacted, or we may incur a higher cost. A material decrease in crude oil production from the fields that supply our refineries, as a result of depressed commodity prices, decreased demand, lack of drilling activity, natural production declines, catastrophic events or otherwise, could result in a decline in the volume of crude oil available to our refineries. In addition, any prolonged disruption of a significant pipeline that is used in supplying crude oil to our refineries or the potential operation of a new, converted or expanded crude oil pipeline that transports crude oil to other markets could result in a decline in the volume of crude oil available to our refineries. Such an event could result in an overall decline in volumes of refined products processed at our refineries and therefore a corresponding reduction in our cash flow. If we are unable to secure additional crude oil supplies of sufficient quality or crude pipeline expansion to our refineries, we will be unable to take full advantage of current and future expansion of our refineries’ production capacities.
For certain raw materials and utilities used by our refineries and other facilities, there are a limited number of suppliers, and, in some cases, we source from a single supplier and/or suppliers in economies that have experienced instability or the supplies are specific to the particular geographic region in which a facility is located. Any significant disruption in supply could affect our ability to obtain raw materials, or increase the cost of such raw materials, which could significantly reduce our production levels or have a material adverse effect on our business, financial condition and results of operations. In addition, certain raw materials that we use are subject to various regulatory laws, and a change in the ability to legally use such raw materials may impact our liquidity, financial position and results of operations.
It is also common in the refining industry for a facility to have a sole, dedicated source for its utilities, such as steam, electricity, water and gas. Having a sole or limited number of suppliers may limit our negotiating power, particularly in the case of rising raw material costs. Any new supply agreements we enter into may not have terms as favorable as those contained in our current supply agreements. Additionally, there is growing concern over the reliability of water sources. The decreased availability or less favorable pricing for water as a result of population growth, drought or regulation could negatively impact our operations.
In addition, periods of disruption in the global supply chain, including as a result of COVID-19, have caused shortages in the equipment and parts necessary to operate our facilities and complete our capital projects. Certain suppliers have experienced, and may continue to experience, delays related to a variety of factors, including logistical delays and component shortages from vendors. We continue to monitor the situation and work closely with our suppliers to minimize disruption to our operations as a result of supply chain interruptions.
If our raw material, utility or water supplies or access to the equipment necessary to operate our facilities were disrupted, our businesses may incur increased costs to procure alternative supplies or equipment or incur excessive downtime, which would have a direct negative impact on our operations.
We depend upon Shell for a substantial portion of the crude supply and distribution network that serve our Mobile Refinery.
Currently Shell supplies all of the crude oil which we refine at the Mobile Refinery. Shell is subject to its own operating and regulatory risks and the occurrence of any of these risks could directly or indirectly affect Shell’s as well as our financial condition, results of operations and cash flows if Shell is unable to deliver us sufficient crude oil to operate the Mobile Refinery at full capacity. Additionally, these risks could affect Shell’s ability to continue operations which could affect its ability to serve our supply and distribution network needs.
We may be negatively impacted by inflation.
Increases in inflation may have an adverse effect on us. Current and future inflationary effects may be driven by, among other things, supply chain disruptions and governmental stimulus or fiscal policies. Continuing increases in inflation could impact the commodity markets generally, the overall demand for our products, our costs for feedstocks, labor, material and services and the margins we are able to realize on our products and services, all of which could have an adverse impact on our business, financial position, results of operations and cash flows. Inflation may also result in higher interest rates, which in turn would result in higher interest expense related to our variable rate indebtedness and any borrowings we undertake to refinance existing fixed rate indebtedness.
Large capital projects can take many years to complete, and the political and regulatory environments or other market conditions may change or deteriorate over time, negatively impacting project returns.
We may engage in capital projects based on the forecasted project economics, political and regulatory environments, and the expected return on the capital to be employed in the project, including the in process Mobile Refinery renewal biodiesel capital project. Large-scale projects take many years to complete, during which time the political and regulatory environment or other market conditions may change from our forecast. As a result, we may not fully realize our expected returns, which could negatively impact our business, financial condition, results of operations, and liquidity.
Our industry and the broader US economy have experienced higher than expected inflationary pressures in the first and second quarters of 2022, related to continued supply chain disruptions, labor shortages and geopolitical instability. Should these conditions persist our business, results of operations and cash flows could be materially and adversely affected.
The first and second quarters of 2022 have seen significant increases in the costs of certain materials, including construction material required for our ongoing capital project at our Mobile Refinery and longer lead times for such materials, as a result of availability constraints, supply chain disruption, increased demand, labor shortages associated with a fully employed US labor force, high inflation and other factors. Supply and demand fundamentals have been further aggravated by disruptions in global energy supply caused by multiple geopolitical events, including the ongoing conflict between Russia and Ukraine. Recent supply chain constraints and inflationary pressures have in the past, and may in the future continue to, adversely impact our operating costs and timelines for capital projects and may negatively impact our ability to procure materials and equipment in a timely and cost-effective manner, if at all, which could result in delays in the completion of ongoing and future capital projects, delays in turn-arounds at our facilities, increased down-time, reduced margins and delays and, as a result, our business, financial condition, results of operations and cash flows could be materially and adversely affected.
The conflict in Ukraine and related price volatility and geopolitical instability could negatively impact our business.
In late February 2022, Russia launched significant military action against Ukraine. The conflict has caused, and could intensify, volatility in natural gas, oil and NGL prices, and the extent and duration of the military action, sanctions and resulting market disruptions could be significant and could potentially have a substantial negative impact on the global economy and/or our business for an unknown period of time. We believe that the increase in crude oil prices during the first half of 2022 has partially been due to the impact of the conflict between Russia and Ukraine on the global commodity and financial markets, and in response to economic and trade sanctions that certain countries have imposed on Russia. Any such volatility and disruptions may also magnify the impact of other risks described herein and in our Annual Report on Form 10-K.
Legal, Environmental, Governmental and Regulatory Risks
We may incur significant environmental remediation costs and liabilities in the operation of our refineries, facilities, terminals and related facilities.
The operation of our refineries, facilities, terminals, and related facilities subject us to the risk of incurring significant environmental remediation costs and liabilities due to our handling of petroleum hydrocarbons and other products, because of air emissions and water discharges related to our operations and activities, and as a result of historical operations and waste disposal practices at our facilities or in connection with our activities, some of which may have been conducted by prior owners or operators. We could incur significant remedial costs in the cleanup of any petroleum hydrocarbons or wastes or hazardous substances or wastes that may have been released on, under or from the properties owned or operated by us.
Some environmental laws may impose joint and several, strict liability for releases of petroleum hydrocarbons and wastes or hazardous substances or wastes, which means in some situations, we could be exposed to liability as a result of our
conduct that was lawful at the time it occurred or the conduct of, or conditions caused by, prior operators or other third parties. Private parties, including the owners of properties adjacent to our operations and facilities where our petroleum hydrocarbons or wastes or hazardous substances or wastes are taken for reclamation or disposal, may also have the right to pursue legal actions to enforce compliance as well as to seek damages for non-compliance with environmental laws and regulations or for personal injury or property damage. We may not be able to recover some or any of these costs from insurance or other sources of indemnity. To the extent that the costs associated with meeting any or all of these requirements are significant and not adequately secured or indemnified for, there could be a material adverse effect on our business, financial condition and results of operations or cash flows and, as result, our ability to make payments of our debt obligations.
The nature of our operations exposes us, and the communities in which we work, to a wide range of health, safety, security and environment risks.
The health, safety, security and environment (HSSE) risks to which we and the communities in which we work are potentially exposed cover a wide spectrum, given the wide geographical area and diversity of our operations. These risks include the effects of natural disasters (including weather events), earthquakes, social unrest, pandemic diseases, criminal actions by external parties, and safety lapses. If a major risk materializes, such as an explosion or hydrocarbon leak or spill, this could result in injuries, loss of life, environmental harm, disruption of business activities, loss or suspension of permits, loss of our licenses to operate. Accordingly, this could have a material adverse effect on our earnings, cash flows and financial condition. Our operations are subject to extensive HSSE regulatory requirements that often change and are likely to become more stringent over time. We could incur significant extra costs in the future because of the need to comply with such requirements. We could also incur significant extra costs due to violations of or liabilities under laws and regulations that involve elements such as fines, penalties, clean-up costs and third-party claims. If HSSE risks materialize, they could have a material adverse effect on our earnings, cash flows and financial condition.
The availability and cost of renewable identification numbers could have an adverse effect on our financial condition and results of operations.
Pursuant to the Energy Policy Act of 2005, Congress established a Renewable Fuel Standard (“RFS”) program that requires annual volumes of renewable fuel be blended into domestic transportation fuel. A Renewable Identification Number (“RIN”) is assigned to each gallon of renewable fuel produced in, or imported into, the United States. We are exposed to the volatility in the market price of RINs. We cannot predict the future prices of RINs. RINs prices are dependent upon a variety of factors, including EPA regulations, the availability of RINs for purchase, and levels of transportation fuels produced, which can vary significantly from quarter to quarter. Additionally, the status of EPA RFS exemptions may impact the price of RINs. EPAs policy on granting certain RFS exemptions has changed under the Biden administration, and some previously granted exemptions have been the subject of legal proceedings that may ultimately result in the reversal of past exemptions. The occurrence of any one or more of these events may increase our operating expenses or make it more difficult for us to operate.
Risks Related to Our Securities
Our outstanding options and convertible securities may adversely affect the trading price of our common stock.
As of the date of the filing, we had (i) outstanding stock options to purchase an aggregate of 4,135,1683 million shares of common stock at a weighted average exercise price of $1.74$1.81 per share; (ii) outstanding warrants to purchase 2,750,0002.6 million shares of common stock at an exercise price of $4.50; (iii) 380,560 outstanding$4.50 per share and 0.2 million shares of Series A Convertible Preferred Stock (which convert on a one-for-one basis (subject to adjustments forcommon stock splitsat an exercise price of $14.15 per share; and recapitalizations) into common stock); and (iv)(iii) outstanding Convertible Senior Notes which may be converted into a maximum of 36,214,96022.2 million shares of common stock, based on the initial maximum conversion rate of 233.6449 shares of the Company’s common stock per $1,000 principal amount of Notes, which is subject to customary and other adjustments described in the Indenture. For the life of the options and warrants, the holders have the opportunity to profit from a rise in the market price of our common stock without assuming the risk of ownership. The issuance of shares upon the exercise of outstanding securities will also dilute the ownership interests of our existing stockholders.
The availability of these shares for public resale, as well as any actual resales of these shares, could adversely affect the trading price of our common stock. We cannot predict the size of future issuances of our common stock pursuant to the exercise of outstanding options or warrants or conversion of other securities, or the effect, if any, that future issuances and sales of shares of our common stock may have on the market price of our common stock. Sales or distributions of substantial amounts of our common stock (including shares issued in connection with an acquisition), or the perception that such sales could occur, may cause the market price of our common stock to decline.
In addition, the common stock issuable upon exercise/conversion of outstanding convertible securities may represent overhang that may also adversely affect the market price of our common stock. Overhang occurs when there is a greater supply of a company’s stock in the market than there is demand for that stock. When this happens the price of our stock will decrease, and any additional shares which stockholders attempt to sell in the market will only further decrease the share price. If the share volume of our common stock cannot absorb shares sold by holders of our outstanding convertible securities, then the value of our common stock will likely decrease.
The Warrants have certain anti-dilutive rights, put and call rights upon the occurrence of a fundamental transaction, and include a limitation on the number of shares of common stock which may be issued upon exercise thereof without shareholder approval.
TheA total of 2,584,900 of the Warrants have a five-year term through April 1, 2027 and a $4.50 per share exercise price and a total of 235,000 of the Warrants have a term through November 26, 2027 and a $9.25 exercise price. All of the Warrants include weighted average anti-dilutive rights in the event any shares of common stock or other equity or equity equivalent securities payable in common stock are granted, issued or sold (or the Company enters into any agreement to grant, issue or sell), or in accordance with the terms of the Warrant Agreement,Agreements, are deemed to have granted, issued or sold, in each case, at a price less than the exercise price, which automatically decreases the exercise price of the Warrants upon the occurrence of such event, as described in greater detail in the Warrant Agreement,Agreements, and increases the number of shares of common stock issuable upon exercise of the Warrants, such that the aggregate exercise price of all Warrants remains the same before and after any such dilutive event. Such anti-dilution rights, if triggered, could result in a significant decrease in the exercise price of the Warrants combined with a significant increase in the number of shares of common stock issuable upon exercise thereof, which could result in significant dilution to existing shareholders.
Upon the occurrence of a fundamental transaction (as described in the Warrant Agreement)Agreements) the Warrant AgreementAgreements (a) providesprovide each holder a put right and (b) providesprovide the Company with a call right in respect of the Warrants. Upon the exercise of a put right by the holder or a call right by the Company, the Company is obligated to repurchase the Warrants for the Black Scholes Value of the Warrants repurchased, as calculated in the Warrant Agreement.Agreements. Such Black Scholes value may be significant and the requirement to pay such amount may prohibit us from completing a transaction which would otherwise be accretive to shareholders or make such transaction more costly.
Additionally, until or unless the Company receives shareholder approval under applicable Nasdaq listing rules for the issuance of more than 19.9% of the Company’s outstanding shares of common stock on the date the Warrant Agreement wasAgreements were entered into (i.e., more than 12,828,681 shares of common stock)(the “Share Cap”), the Company may not issue more shares of common stock upon exercise of the Warrants than totals the Share Cap, and is required to pay the Lenders cash, based on the fair market value of any shares required to be issued upon exercise of the Warrants (as calculated in the Warrant Agreement)Agreements), which would exceed the Share Cap. In the event the anti-dilutive rights of the Warrants result in more than 12,828,681 shares of common stock being issuable upon exercise of the Warrants, we could be required to pay cash to the holders of the Warrants in the amount equal to such excess shares, which could have a significant adverse effect on our available funds and liquidity.
The Warrants also include cashless exercise rights. As a result, we may not receive any cash upon the exercise of the Warrants.
We face significant penalties and damages in the event we do not timely file or obtain effectiveness of a registration statement registering the resale of the shares of common stock issuable upon exercise of the Warrants or such registration statement is not available for the sale of such shares.
In connection with the grant of the Warrants, the Company and the holders of such Warrants entered into a Registration Rights Agreement dated April 1, 2022 (the “Registration Rights Agreement”).Agreement. Under the Registration Rights Agreement, the Company agreed to use commercially reasonable efforts to file a registration statement (the “Initial Registration Statement”) with the Securities and Exchange Commission (the “SEC,” or the “Commission”) as soon as reasonably practicable and in no event later than June 15, 2022, for purposes of registering the resale of the shares of common stock issuable upon exercise of the Warrants.Warrants no later than July 1, 2022. The Company also agreed to use commercially reasonable efforts to cause the SEC to declare the Registration Statement effective as soon as practicable and no later than 45 days following the filing of the Initial Registration Statement; provided, that such date
is extended until 12075 days after the filing date if the Initial Registration Statement is reviewed by the staff of the Commission. The Registration Statement was filed with the SEC and became effective on July 8, 2022. The Registration Rights Agreement also provides the holders of the Warrants certain piggyback and demand registration rights (including pursuant to an underwritten offering, in the event the gross proceeds from such underwritten offering are expected to exceed $35 million).
If, subject to certain limited exceptions described in the Registration Rights Agreement, (i) the Initial Registration Statement required to be filed pursuant to the Registration Rights Agreement is not filed on or prior to the required filing deadline (or without complying with the terms of the Registration Rights Agreement), (ii) a registration statement registering for resale all of the registrable securities is not declared effective by the Commission by the required effectiveness deadline, or (iii) during the period commencing on the effective date of the Initial Registration Statement and ending on the earlier of the date when there are no registrable securities or the third anniversary of the effective date of the Initial Registration Statement, a registration statement is not continuously effective
to allow the sale of the shares underlying the Warrants, for more than 10 consecutive calendar days or more than an aggregate of 15 calendar days (which need not be consecutive) during any 12-month period, then, in addition to any other rights such holder of Warrants may have under the Registration Rights Agreement or applicable law, (x) on the first such applicable default date, the Company is required to pay to such holder of a Warrant an amount in cash, as partial liquidated damages and not as a penalty, equal to 1.0% of the fair market value (such fair market value calculated as required under the Registration Rights Agreement) of the registrable securities held by such holder (the “1% Penalty”), and (y) on each monthly anniversary of such default date until all applicable defaults have been cured, shall pay the 1% Penalty, subject to a maximum penalty of 10% of the fair market value of the registrable securities held by each applicable holder of Warrants (such fair market value calculated as required under the Registration Rights Agreement).
The Company has agreed, among other things, to indemnify the holders of the Warrants and their affiliates with respect to certain liabilities and to pay all fees and expenses incident to the Company’s obligations under the Registration Rights Agreement.
In the event the Initial Registration Statement is not timely filed or declared effective within the required time limits set forth above, or such registration statement is subsequently suspended or terminated, or we otherwise fail to meet certain requirements set forth in the Registration Rights Agreement, we could be required to pay significant penalties which could adversely affect our cash flow and cause the value of our securities to decline in value.
Item 2. Recent Sales of Unregistered Securities
There have been no sales of unregistered securities during the quarter ended March 31,June 30, 2022 and from the period from JanuaryJuly 1, 2022, to the filing date of this report, which have not previously been disclosed in a Current Report on Form 8-K, except as set forth below:
In JanuaryMay 2022, a holder of Series A Convertible Preferred Stock of the Company converted 1,4516,223 shares of the Company’s Series A Convertible Preferred Stock into 1,4516,223 shares of common stock, pursuant to the terms of such Series A Convertible Preferred Stock.
In February 2022, a holder of Series A Convertible Preferred Stock of the Company converted 2,995 shares of the Company’s Series A Convertible Preferred Stock into 2,995 shares of common stock, pursuant to the terms of such Series A Convertible Preferred Stock.
In March 2022, a holder of Series A Convertible Preferred Stock of the Company converted 595 shares of the Company’s Series A Convertible Preferred Stock into 595 shares of common stock, pursuant to the terms of such Series A Convertible Preferred Stock.
We claim an exemption from registration provided by Section 3(a)(9) of the Securities Act for such issuance, as the securities were exchanged by us with our existing security holder in a transaction where no commission or other remuneration was paid or given directly or indirectly for soliciting such exchange.
On July 11, 2022, two holders of warrants to purchase an aggregate of 165,000 shares of our common stock with an exercise price of $4.50 per share and a holder of warrants to purchase 15,000 shares of our common stock with an exercise price of $9.25 per share, exercised such warrants in a cashless exercise, pursuant to the terms of such warrants, and were issued 98,075 shares of common stock. We claim an exemption from registration provided by Section 3(a)(9) of the Securities Act for such issuance, as the securities were exchanged by us with our existing security holder in a transaction where no commission or other remuneration was paid or given directly or indirectly for soliciting such exchange.
On July 19, 2022, a holder of warrants to purchase 100 shares of our common stock with an exercise price of $4.50 per share exercised such warrants for cash and was issued 100 shares of common stock. The shares were issued pursuant to equity securities originally offered and sold without registration under the Securities Act to accredited investors in reliance upon the exemption provided by Rule 4(a)(2).
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.
None.
Item 6. Exhibits
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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. |
|
2.1+£ | | | | | | 8-K | | 2.1 | | 5/27/2021 | | 001-11476 |
2.2 | | | | | | 8-K | | 2.2 | | 4/7/2022 | | 001-11476 |
3.1 | | | | | | 8-K | | 3.1 | | 7/2/2021 | | 001-11476 |
4.1 | | | | | | 8-K | | 4.1 | | 11/2/2021 | | 001-11476 |
4.2 | | | | | | 8-K | | 4.2 | | 11/2/2021 | | 001-11476 |
4.3 | | | | | | 8-K | | 4.1 | | 4/7/2022 | | 001-11476 |
10.1# | | | | | | 8-K | | 10.2 | | 5/27/2021 | | 001-11476 |
10.2 | | | | | | 8-K | | 10.1 | | 7/2/2021 | | 001-11476 |
10.3 | | | | | | 8-K | | 10.2 | | 10/14/2021 | | 001-11476 |
10.4 | | Asset Purchase Termination Agreement among Vertex Energy, Inc., Vertex Energy Operating, LLC, Vertex Refining LA, LLC, Vertex Refining OH, LLC, Cedar Marine Terminals, L.P., H & H Oil, L.P., Vertex Recovery, L.P., and Safety-Kleen Systems, Inc. dated as of January 24, 2022 | | | | 8-K | | 10.1 | | 1/25/2022 | | 001-11476 |
10.5£# | | | | | | 8-K | | 10.2 | | 1/25/2022 | | 001-11476 |
10.6 | | | | | | 8-K | | 10.1 | | 2/17/2022 | | 001-11476 |
10.7 | | Commitment Letter, dated as of February 17, 2022, by and among certain funds and accounts managed or advised by each of BlackRock Financial Management, Inc., Whitebox Advisors LLC and Highbridge Capital Management, LLC, Chambers Energy Capital IV, LP, CrowdOut Credit Opportunities Fund LLC , CrowdOut Warehouse LLC, Vertex Energy, Inc. and Vertex Refining Alabama LLC | | | | 8-K | | 10.1 | | 2/22/2022 | | 001-11476 |
10.8 | | | | | | 8-K | | 10.1 | | 3/3/2022 | | 001-11476 |
10.9 | | | | | | 8-K | | 10.2 | | 3/3/2022 | | 001-11476 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
Incorporated by Reference |
Exhibit Number | | Description of Exhibit | | Filed or Furnished Herewith | | Form | | Exhibit | | Filing Date/Period End Date | | File No. |
|
2.1+£ | | | | | | 8-K | | 2.1 | | 5/27/2021 | | 001-11476 |
2.2 | | | | | | 8-K | | 2.2 | | 4/7/2022 | | 001-11476 |
4.1 | | | | | | 8-K | | 4.1 | | 11/2/2021 | | 001-11476 |
4.2 | | | | | | 8-K | | 4.2 | | 11/2/2021 | | 001-11476 |
4.3 | | | | | | 8-K | | 4.1 | | 4/7/2022 | | 001-11476 |
4.4 | | | | | | 8-K | | 4.1 | | 5/27/2022 | | 001-11476 |
10.1# | | | | | | 8-K | | 10.2 | | 5/27/2021 | | 001-11476 |
10.2 | | | | | | 8-K | | 10.1 | | 7/2/2021 | | 001-11476 |
10.3 | | | | | | 8-K | | 10.2 | | 10/14/2021 | | 001-11476 |
10.4 | | | | | | 8-K | | 10.1 | | 3/3/2022 | | 001-11476 |
10.5 | | | | | | 8-K | | 10.2 | | 3/3/2022 | | 001-11476 |
10.6 | | | | | | 8-K | | 10.3 | | 3/3/2022 | | 001-11476 |
10.7 | | | | | | 8-K | | 10.4 | | 3/3/2022 | | 001-11476 |
10.8 | | Loan and Security Agreement dated April 1, 2022, by and among Vertex Refining Alabama LLC, as borrower, Vertex Energy, Inc., as parent and as a guarantor, certain direct and indirect subsidiaries of Vertex Energy, Inc., as guarantors, the lenders party thereto, and Cantor Fitzgerald Securities, as administrative agent and collateral agent for the lenders | | | | 8-K | | 10.1 | | 4/7/2022 | | 001-11476 |
10.9 | | | | | | 8-K | | 10.2 | | 4/7/2022 | | 001-11476 |
| 10.10 | 10.10 | | | | 8-K | | 10.3 | | 3/3/2022 | | 001-11476 | 10.10 | | | | 8-K | | 10.3 | | 4/7/2022 | | 001-11476 |
10.11 | 10.11 | | | | 8-K | | 10.4 | | 3/3/2022 | | 001-11476 | 10.11 | | | | 8-K | | 10.4 | | 4/7/2022 | | 001-11476 |
10.12# | | Escrow Agreement, dated as of March 2, 2022, by and among Vertex Energy, Inc., Vertex Refining Alabama LLC, certain funds and accounts managed or advised by each of BlackRock Financial Management, Inc., Whitebox Advisors LLC and Highbridge Capital Management, LLC, Chambers Energy Capital IV, LP, CrowdOut Credit Opportunities Fund LLC , CrowdOut Capital LLC, and Cantor Fitzgerald Securities | | 8-K | | 10.5 | | 3/3/2022 | | 001-11476 | |
10.12 | | 10.12 | | | | 8-K | | 10.5 | | 4/7/2022 | | 001-11476 |
10.13 | 10.13 | | | | 8-K | | 10.1 | | 3/25/2022 | | 001-11476 | 10.13 | | | | 8-K | | 10.6 | | 4/7/2022 | | 001-11476 |
10.14 | 10.14 | | Loan and Security Agreement dated April 1, 2022, by and among Vertex Refining Alabama LLC, as borrower, Vertex Energy, Inc., as parent and as a guarantor, certain direct and indirect subsidiaries of Vertex Energy, Inc., as guarantors, the lenders party thereto, and Cantor Fitzgerald Securities, as administrative agent and collateral agent for the lenders | | 8-K | | 10.1 | | 4/7/2022 | | 001-11476 | 10.14 | | | | 8-K | | 10.7 | | 4/7/2022 | | 001-11476 |
10.15 | 10.15 | | | | 8-K | | 10.2 | | 4/7/2022 | | 001-11476 | 10.15 | | | | 8-K | | 10.8 | | 4/7/2022 | | 001-11476 |
10.16 | 10.16 | | | | 8-K | | 10.3 | | 4/7/2022 | | 001-11476 | 10.16 | | | | 8-K | | 10.11 | | 4/7/2022 | | 001-11476 |
10.17 | | | | 8-K | | 10.4 | | 4/7/2022 | | 001-11476 | |
10.17#£ | | 10.17#£ | | | | 8-K | | 10.12 | | 4/26/2022 | | 001-11476 |
10.18 | 10.18 | | | | 8-K | | 10.5 | | 4/7/2022 | | 001-11476 | 10.18 | | | | 8-K | | 10.13 | | 4/26/2022 | | 001-11476 |
10.19 | | | | 8-K | | 10.6 | | 4/7/2022 | | 001-11476 | |
10.20 | | | | 8-K | | 10.7 | | 4/7/2022 | | 001-11476 | |
10.19£ | | 10.19£ | | | | 8-K | | 10.14 | | 4/26/2022 | | 001-11476 |
10.20# | | 10.20# | | Amendment Number One to Loan and Security Agreement dated May 26, 2022, by and among Vertex Refining Alabama LLC, as borrower, Vertex Energy Inc., as parent and as a guarantor, certain direct and indirect subsidiaries of Vertex Energy Inc., as guarantors, the lenders party thereto, and Cantor Fitzgerald Securities, as administrative agent and collateral agent for the lenders | | 8-K | | 10.1 | | 5/27/2022 | | 001-11476 |
10.21 | 10.21 | | | | 8-K | | 10.8 | | 4/7/2022 | | 001-11476 | 10.21 | | | | 8-K | | 10.2 | | 5/27/2022 | | 001-11476 |
10.22 | | | | 8-K | | 10.11 | | 4/7/2022 | | 001-11476 | |
10.23#£ | | | | 8-K | | 10.12 | | 4/26/2022 | | 001-11476 | |
10.24 | | | | 8-K | | 10.13 | | 4/26/2022 | | 001-11476 | |
10.22*** | | 10.22*** | | | | 8-K | | 10.1 | | 6/14/2022 | | 001-11476 |
10.23 | | 10.23 | | | | 8-K | | 10.2 | | 6/21/2022 | | 001-11476 |
31.1 | | 31.1 | | | | X | |
31.2 | | 31.2 | | | | X | |
32.1 | | 32.1 | | | | X | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
10.25£ | | | | | | 8-K | | 10.14 | | 4/26/2022 | | 001-11476 |
31.1 | | | | X | | | | | | | | |
31.2 | | | | X | | | | | | | | |
32.1 | | | | X | | | | | | | | |
32.2 | | | | X | | | | | | | | |
101* | | Inline XBRL Document Set for the condensed consolidated financial statements and accompanying notes in Part I, Item 1, “Financial Statements” of this Quarterly Report on Form 10-Q | | X | | | | | | | | |
101.INS* | | 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 Quarterly Report on Form 10-Q, included in the Exhibit 101 Inline XBRL Document Set | | X | | | | | | | | |
* Filed herewith.
** Furnished herewith.
*** Indicates management contract or compensatory plan or arrangement.
# Certain schedules and exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. A copy of any omitted schedule or exhibit will be furnished supplementally to the Securities and Exchange Commission upon request; provided, however that Vertex Energy, Inc. may request confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, for any schedule or exhibit so furnished.
£ Certain confidential portions of this Exhibit were omitted by means of marking such portions with brackets (“[****]”) because the identified confidential portions (i) are not material and (ii) the Company customarily and actually treats that information as private or confidential.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, hereunto duly authorized.
| | | | | |
| VERTEX ENERGY, INC. |
| |
Date: May 9,August 8, 2022 | By: /s/ Benjamin P. Cowart |
| Benjamin P. Cowart |
| Chief Executive Officer |
| (Principal Executive Officer) |
| |
| |
Date: May 9,August 8, 2022 | By: /s/ Chris Carlson |
| Chris Carlson |
| Chief Financial Officer |
| (Principal Financial/Accounting Officer) |