SECURITIES & EXCHANGE COMMISSION EDGAR FILING
Vertex Energy Inc.
Form: 10-K
Date Filed: 2013-03-21
Corporate Issuer CIK: 890447
Symbol:
SIC Code:
VTNR
4953
© Copyright 2014, Issuer Direct Corporation. All Right Reserved. Distribution of this document is strictly prohibited, subject to the
terms of use.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☑ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2012
❑ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO _____________
Commission File Number 001-11476
———————
VERTEX ENERGY, INC.
(Exact name of registrant as specified in its charter)
———————
NEVADA
(State or other jurisdiction of
incorporation or organization)
1331 GEMINI STREET, SUITE 250
HOUSTON, TEXAS
(Address of principal executive offices)
94-3439569
(I.R.S. Employer Identification No.)
77058
(Zip Code)
Registrant's telephone number, including area code: 866-660-8156
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock,
$0.001 Par Value Per Share
Name of each exchange on which registered
The NASDAQ Stock Market LLC
(Nasdaq Capital Market)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ❑ No ☑
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ❑ No ☑
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 x No ❑
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted 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 and post such files). Yes ☑ No ❑
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. ❑
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Indicate by check mark whether the registrant is a large accelerated filer, and accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ❑
Non-accelerated filer ❑
Accelerated filer ❑
Smaller reporting company ☑
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.
Yes ❑ No ☑
The issuer's revenues for the most recent fiscal year ended December 31, 2012 were $134,573,243.
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the
common equity was last sold as of the last business day of the registrant’s most recently completed second fiscal quarter was approximately
$8,037,170.
State the number of shares of the issuer’s common stock outstanding, as of the latest practicable date: 17,176,001 shares of common stock issued
and outstanding as of March 18, 2013.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement relating to its 2013 annual meeting of shareholders (the “2013 Proxy Statement”) are
incorporated by reference into Part III of this Annual Report on Form 10-K where indicated. The 2013 Proxy Statement will be filed with the U.S.
Securities and Exchange Commission within 120 days after the end of the fiscal year to which this report relates.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2012
TABLE OF CONTENTS
Part I
Item 1. Business
Item 1A. Risk Factors
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Part II
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis or Plan of Operation
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Part III
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
Part IV
Item 15. Exhibits, Financial Statement Schedules
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
PART I
This Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. In some cases, you can identify forward-looking statements by the following
words: “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “ongoing,” “plan,” “potential,” “predict,” “project,” “should,” or
the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. Forward-looking
statements are not a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such
performance or results will be achieved. Forward-looking statements are based on information available at the time the statements are made and
involve known and unknown risks, uncertainties and other factors that may cause our results, levels of activity, performance or achievements to be
materially different from the information expressed or implied by the forward-looking statements in this Report. These factors include:
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the level of competition in our industry and our ability to compete;
our ability to respond to changes in our industry;
the loss of key personnel or failure to attract, integrate and retain additional personnel;
our ability to protect our intellectual property and not infringe on others’ intellectual property;
our ability to scale our business;
our ability to maintain supplier relationships and obtain adequate supplies of feedstocks;
our ability to obtain and retain customers;
our ability to produce our products at competitive rates;
our ability to execute our business strategy in a very competitive environment;
trends in, and the market for, the price of oil and gas and alternative energy sources;
our ability to maintain our relationship with KMTEX, Ltd.;
the impact of competitive services and products;
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, successfully negotiate acquisition terms or effectively integrate acquired
companies or businesses;
interruptions at our facilities;
unexpected changes in our anticipated capital expenditures resulting from unforeseen required maintenance, repairs, or upgrades;
our ability to effectively manage our growth;
the lack of capital available on acceptable terms to finance our continued growth; and
other risk factors included under “Risk Factors” in this Report.
You should read the matters described in “Risk Factors” and the other cautionary statements made in this Report as being applicable to all
related forward-looking statements wherever they appear in this Report. We cannot assure you that the forward-looking statements in this Report
will prove to be accurate and therefore prospective investors are encouraged not to place undue reliance on forward-looking statements. Other
than as required by law, we undertake no obligation to update or revise these forward-looking statements, even though our situation may change
in the future.
Please see the “Glossary of Selected Terms” filed as Exhibit 99.1 hereto, for a list of abbreviations and definitions used throughout this
report.
In this Annual Report on Form 10-K, 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.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
ITEM 1. Business
Corporate History:
Vertex Energy, Inc. (the “Company,” “we,” “us,” and “Vertex”) was formed as a Nevada corporation on May 14, 2008. Pursuant to an
Amended and Restated Agreement and Plan of Merger dated May 19, 2008, by and between Vertex Holdings, L.P. (formerly Vertex Energy, L.P.),
a Texas limited partnership ("Holdings"), us, World Waste Technologies, Inc., a California corporation (“WWT” or “World Waste”), Vertex Merger
Sub, LLC, a California limited liability company and our wholly-owned subsidiary ("Merger Subsidiary"), and Benjamin P. Cowart, our Chief
Executive Officer, as agent for our shareholders (as amended from time to time, the “Merger Agreement”). Effective on April 16, 2009, World
Waste merged with and into Merger Subsidiary, with Merger Subsidiary continuing as the surviving corporation and becoming our wholly-owned
subsidiary (the "Merger"). In connection with the Merger, (i) each outstanding share of World Waste common stock was cancelled and exchanged
for 0.10 shares of our common stock; (ii) each outstanding share of World Waste Series A preferred stock was cancelled and exchanged for
0.4062 shares of our Series A preferred stock; and (iii) each outstanding share of World Waste Series B preferred stock was cancelled and
exchanged for 11.651 shares of our Series A preferred stock.
Additionally, as a result of the Merger, as the successor entity of World Waste, we assumed World Waste’s filing obligations with the
Securities and Exchange Commission and our common stock began trading on the Over-The-Counter Bulletin Board under the symbol “VTNR”
effective May 4, 2009. Subsequently, effective February 13, 2013, our common stock began trading on the NASDAQ Capital Market. Finally, as a
result of the Merger, the common stock of World Waste was effectively reversed one for ten (10) as a result of the exchange ratios set forth in the
Merger, and unless otherwise noted, the impact of such effective reverse stock split, created by the exchange ratio set forth above, is retroactively
reflected throughout this Report.
Recent Acquisition
Effective as of August 31, 2012, we acquired 100% of the outstanding equity interests of Vertex Acquisition Sub, LLC (“Acquisition Sub”),
a special purpose entity consisting of substantially all of the assets of Holdings and real-estate properties of B & S Cowart Family L.P. (“B&S LP”
and the “Acquisition”). Prior to closing the Acquisition, Holdings contributed to Acquisition Sub substantially all of its assets and liabilities relating
to the business of transporting, storing, processing and re-refining petroleum products, crudes and used lubricants, including all of the outstanding
equity interests in Holdings’ wholly-owned operating subsidiaries, Cedar Marine Terminals, L.P. (“CMT”); Crossroad Carriers, L.P. (“Crossroad”);
Vertex Recovery, L.P. (“Vertex Recovery”); and H&H Oil, L.P. (“H&H Oil”), and B&S LP contributed real estate associated with the operations of
H&H Oil.
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Cedar Marine Terminals, L.P. operates a 19-acre bulk liquid storage facility on the Houston Ship Channel. The terminal
serves as a truck-in, barge-out facility and provides throughput terminal operations. Cedar Marine Terminals is also the site
of the Thermal Chemical Extraction Process (“TCEP”) (described below).
Crossroad Carriers, L.P. is a third-party common carrier that provides transportation and logistical services for liquid
petroleum products, as well as other hazardous materials and product streams.
Vertex Recovery L.P. is a generator solutions company for the recycling and collection of used oil and oil-related residual
materials from large regional and national customers throughout the U.S. and Canada. It facilitates its services through a
network of independent recyclers and franchise collectors.
H&H Oil, L.P. collects and recycles used oil and residual materials from customers based in Austin, Baytown, San Antonio
and Corpus Christi, Texas.
We paid the following consideration for 100% of the equity interests in Acquisition Sub (i) to Holdings, (a) $14.8 million in cash and
assumed debt; and (b) 4,545,455 million restricted shares of our common stock; and (ii) to B&S LP, $1.7 million cash consideration, representing
the appraised value of certain real estate contributed by B&S LP to Acquisition Sub. Additionally, for each of the three one-year periods following
September 11, 2012, Holdings will be eligible to receive earn-out payments of $2.23 million, up to $6.7 million in the aggregate, contingent on the
combined company achieving adjusted EBITDA targets of $10.75 million, $12.0 million and $13.5 million, respectively, in those periods. A total of
$1.0 million of the purchase price will be held in escrow for 18 months to satisfy indemnity claims.
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Benjamin P. Cowart, our Chief Executive Officer, President, Chairman and largest shareholder directly or indirectly owned a 77% interest
in Holdings and a 100% interest in B&S LP. Additionally, Chris Carlson, our Chief Financial Officer, owned a 10% interest in Holdings.
We had numerous relationships and related-party transactions with Holdings and its subsidiaries prior to closing the Acquisition, including,
but not limited to, our lease of a storage facility, our subletting of office space, and agreements to operate the TCEP facility and to transport and
store feedstock and end products. The closing of the Acquisition eliminates these related party transactions going forward. The description of our
operations below reflects the closing of the Acquisition, unless otherwise stated or the discussion requires otherwise.
Description of Business Activities:
We are an environmental services company that recycles industrial waste streams and off-specification commercial chemical products.
Our primary focus is recycling used motor oil and other petroleum by-products. We are engaged in operations across the entire petroleum
recycling value chain including collection, aggregation, transportation, storage, re-refinement, and sales of aggregated feedstock and re-refined
products to end users. We operate in two divisions- Black Oil and Refining and Marketing. Our Black Oil division collects and purchases used
motor oil directly from third-party generators, aggregates used motor oil from an established network of local and regional collectors, and sells
used motor oil to our customers for use as a feedstock or replacement fuel for industrial burners. Our Refining and Marketing division aggregates
and manages the re-refinement of used motor oil and other petroleum by-products and sells the re-refined products to end customers. We
operate a refining facility that uses our proprietary TCEP and we also utilize third-party processing facilities.
Black Oil Division
Our Black Oil division is engaged in the collection, aggregation, and sale of used motor oil, as well as related transportation and storage
activities. 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 13 collection vehicles which routinely visit
generators to collect and purchase used motor oil. We also aggregate used oil from a diverse network of approximately 50 suppliers who operate
similar collection businesses to ours.
We manage the logistics of transport, storage and delivery of used oil to our customers. We own a fleet of 7 transportation trucks and
more than 90 aboveground storage tanks with over 4.5 million gallons of storage capacity. These assets are used by both the Black Oil Division
and the Refining and Marketing Division. In addition, we also utilize third parties for the transportation and storage of used oil
feedstocks. Typically, we sell used oil to our customers in bulk to ensure efficient delivery by truck, rail, or barge. In many cases, we have
contractual purchase and sale agreements with our suppliers and customers, respectively. We believe these contracts are beneficial to all parties
involved because it ensures that a minimum volume is purchased from collectors and generators, a minimum volume is sold to our customers, and
we are able to minimize our inventory risk by a spread between the costs to acquire used oil and the revenues received from the sale and delivery
of used oil. At Cedar Marine Terminal we use our proprietary TCEP technology to re-refine used oil into marine fuel cutterstock and a higher-
value feedstock for further processing.
Refining and Marketing Division
Our Refining and Marketing division is engaged in the aggregation of feedstock, re-refining it into higher value end products, and selling
these products to our customers, as well as related transportation and storage activities. We aggregate a diverse mix of feedstocks including used
motor oil, petroleum distillates, transmix and other off-specification chemical products. These feedstock streams are purchased from pipeline
operators, refineries, chemical processing facilities and third-party providers, and are also transferred from our Black Oil division. We have a toll-
based processing arrangement in place with KMTEX, Ltd. (“KMTEX”) to re-refine feedstock streams, under our direction, into various end products
that we specify. KMTEX uses industry standard processing technologies to re-refine our feedstocks into pygas, gasoline blendstock and marine
fuel cutterstock. We sell all of our re-refined products directly to end-customers or to processing facilities for further refinement.
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We currently provide our services in 13 states, primarily in the Gulf Coast and Central Midwest regions of the United States. During the
twelve month period ending December 31, 2012, we aggregated approximately 60 million gallons of used motor oil and other petroleum by-
product feedstocks and managed the re-refining of approximately 24.2 million gallons of used motor oil with our proprietary TCEP.
Biomass Renewable Energy
We are also continuing to work on joint development commercial projects which focus on the separation of municipal solid waste into
feedstocks for energy production. We are very selective in choosing opportunities that we believe will result in value for our shareholders. We
can provide no assurance that the ongoing venture will successfully bring any projects to a point of financing or successful construction and
operation.
Thermal Chemical Extraction Process
We own the intellectual property for our patent pending 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 Industry
The used oil recycling industry is comprised of multiple participants including generators, collectors, aggregators, processors, and end
users. Generators are entities that generate used oil through their daily operations such as automotive businesses conducting oil changes on
consumer and commercial vehicles and industrial users changing lubricants on machinery and heavy equipment. Collectors are typically local
businesses that purchase used oil from generators and provide on-site collection services. The collection market is highly fragmented and we
believe there are more than 700 used oil collectors in the United States. Aggregators are specialized businesses that purchase used oil and
petroleum by-products from multiple collectors and sell and deliver it as feedstock to processors. Processors, or re-refineries, utilize a processing
technology to convert the used oil or petroleum by-product into a higher-value feedstock or end-product.
Conventional re-refineries typically employ vacuum distillation and hydrotreating processes to transform used oil into various grades of
base oil. Vacuum distillation is a process that removes emulsified contaminated water and separates used oil into vacuum gas oil and light
fuels. The vacuum gas oil is then hydrotreated to produce lubricating base oil. Hydrotreating is a process which combines chemical catalysts,
heat, and pressure to remove impurities such as sulfur, chlorine, and oxygen and to stabilize the end product. A re-refined lubricating base oil is of
equal quality and will last as long as a virgin base oil. In addition, other re-refining processes transform used oil into product grades slightly lower
than base oil. These products, along with vacuum gas oil and the end product produced by TCEP, are commonly referred to as intermediate
products and are used as industrial fuels or transportation fuel blendstocks.
The petroleum by-products industry is driven by the financial and environmental benefits of recycling, as well as by the amount of
petroleum by-product generated each year. We believe used motor oil is among the largest segments of petroleum by-products and that
approximately 1.37 billion gallons of used oil are available for recovery in the U.S. annually, of which approximately 0.95 billion gallons are actually
recovered and recycled in one of two ways: (i) by burning it as an industrial fuel; or (ii) by re-refining it into higher value end products, such as
lubricating base oils, fuel oil cutterstock, or transportation fuels (pursuant to the U.S. Department of Energy, July 2006 Report entitled “Used Oil
Re-refining Study to Address Energy Policy Act of 2005 Section 1838”). The market value of recycled oil is based, in large part, on its end use. In
general, the market price for used motor oil that is burned as an industrial fuel is driven by the cost of competing fuels, including natural gas, while
the market value of re-refined used motor oil is driven by competing petroleum products. The extent to which the financial benefits of recycling
used oil are realized is driven by operating efficiency in aggregating, storing and transporting used oil supply; the extent to which the used oil is re-
refined; and the price spread between natural gas and crude oil.
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In the U.S., we believe that of the 1.3 billion gallons of used oil generated annually approximately 200 million gallons are improperly
disposed, 200 – 250 million gallons are re-refined into lubricating base oils, 150 - 200 million gallons are re-refined into intermediate products with
grades slightly lower than base oil, and 650 – 750 million gallons are burned as an industrial fuel source. We believe that the amount of used oil
being re-refined into base oils and intermediate products in the U.S. will increase in 2013 as additional re-refining capacity comes online. As of
the date of this Report, the approximate market price for used oil is $1.80 per gallon, the approximate market price of intermediate re-refined
products ranges from $2.00 to $3.00, and the approximate price for lubricating base oil ranges from $3.50 to $4.50 per gallon, representing a U.S.
market size of $2.4 - $2.8 billion for recycled oil.
As with the financial benefits of recycling used oil, the environmental benefits are also driven by its end use. Environmental regulations
prohibit the disposal of used oil in sewers or landfills because used motor oil is insoluble and contains heavy metals and other contaminants that
make it detrimental to the environment if improperly disposed. Compared to burning used oil as an industrial fuel, re-refined oil significantly
reduces the amount of toxic heavy metals and greenhouse gases and other pollutants introduced into the environment. In addition, the use of re-
refined motor oil conserves petroleum that would have otherwise been refined into virgin base stock oil.
We believe that the used oil recycling market has significant growth potential through increasing the percentage of recycled oil that is re-
refined rather than burned as a low cost industrial fuel. We believe that the financial and environmental benefits of re-refining used oil combined
with consumer and commercial demand for high-quality, environmentally responsible products will drive growth in demand for re-refined oil and re-
refining capacity in the United States. Furthermore, we believe that increasing consumer and industrial awareness of the environmental impact of
improperly disposing used oil may drive additional market growth as approximately 200 million gallons of used oil generated each year are
improperly disposed rather than recycled.
Used motor oil is burned by various users such as asphalt companies, paper mills and industrial facilities as an alternative to their base
load natural gas or other liquefied fuels, to offset operational costs. Therefore, the commercial price of used oil is typically slightly less than
natural gas. Similarly, re-refined oil is used as a substitute for various virgin petroleum-based products with pricing driven by the market price of
crude oil. Since there is not an active marketplace for used and re-refined oil prices, we use the prices of natural gas and crude as benchmarks in
our industry. Typically, the spread between crude and natural gas prices is an accurate proxy for the potential incremental value of re-refining
used oil. Over the past few years, this spread has been increasing, resulting in higher profit margins for re-refineries.
Our Competitive Strengths
Large, Diversified Feedstock Supply Network.
We obtain our feedstock supply through a combination of direct collection activities and purchases from third-party suppliers. We believe
our balanced direct and indirect approach to obtaining feedstock is highly advantageous because it enables us to maximize total supply
and reduce our reliance on any single supplier and the risk of not fulfilling our minimum feedstock sale quotas. We collect feedstock
directly from over 2,000 generators including oil change service stations, automotive repair shops, manufacturing facilities, petroleum
refineries and petrochemical manufacturing operations, as well as brokers. We aggregate used oil from a diverse network of
approximately 50 suppliers who operate similar collection businesses to ours. On a pro forma basis, consolidating our company with
Acquisition Sub, our total feedstock supply (consisting of collected and aggregated feedstock volume) for the twelve month period ended
December 31, 2012, was approximately 60 million gallons.
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Strategic Relationships.
We have established relationships with key feedstock suppliers, storage and transportation providers, oil re-refineries, and end-user
customers. We believe our relationships with these parties are strong, in part due to our high level of customer service, competitive
prices, and our ability to contract (for purchase or sale) long-term, minimum monthly feedstock commitments. We believe that our
strategic relationships could lead to contract extensions and expanded feedstock supply or purchase agreements.
Proprietary Technology.
Our proprietary TCEP technology produces a fuel oil cutterstock for the fuel oil market or a refining feedstock. We are able to build TCEP
re-refining facilities at a significantly lower cost than conventional re-refineries. We estimate the cost to build a TCEP plant with capacity
of 50 million gallons at approximately $10 - $15 million, whereas a similar sized base oil plant with vacuum distillation towers and a
hydrotreater can cost in excess of $50 million. We believe this cost differential is a significant competitive advantage because it will enable
us to economically expand our geographic footprint and move closer to new feedstock sources and end-customers.
Logistics Capabilities.
We have extensive expertise and experience managing and operating feedstock supply chain logistics and multimodal transportation
services for customers who purchase our feedstock or higher-value, re-refined products. We believe that our scale, infrastructure,
expertise, and contracts enable us to cost effectively transport product and consistently meet our customers’ volume, quality and delivery
schedule requirements.
Scale of Operations.
We believe that the size and scale of our operations is a significant competitive advantage when competing for new business and
maintaining existing customer relationships. Price is one of the main competitive factors in the feedstock collection industry and because
we are able to effectively leverage our fixed operating costs and economies of scale, we believe that our prices are competitive. Through
our network of suppliers and customers, we aggregate a large amount of feedstock, which enables us to enter into minimum purchase and
sale contracts as well as accept large volume orders year-round. We believe this is a competitive advantage because it minimizes our
suppliers’ inventory risk and ensures our customers’ minimum order volumes are satisfied. In addition, we believe our end customers
prefer to work with an exclusive supplier rather than manage multiple customers.
Diversified End Product Sales.
We believe that the diversity of the products we sell reduces our overall risk and exposure to pricing fluctuations. Prices for petroleum
based products can be impacted significantly by supply and demand fluctuations which are not correlated with general commodity price
changes. For instance, in a rising commodity price environment with a significant over-supply of base oil, the price of base oil may fall
precipitously while the price of gasoline increases. We offer a diversified product mix consisting of used motor oil, fuel oil, pygas, and
gasoline blendstock. We can also control our mix of end products by choosing to either resell collected feedstock or re-refine it into a
higher-value product.
Management Team.
We are led by a management team with expertise in petroleum recycling, finance, operations, and re-refinement technology. Each
member of our senior management team has more than 15 years of industry experience. We believe the strength of our management
team will help our success in the marketplace.
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Our Strategy
The principal elements of our strategy include:
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 displacing
incumbent collectors; increasing the number of collection personnel, vehicles, equipment, and geographies 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, including assets or technologies which complement TCEP. Currently, we are using TCEP to re-refine used oil feedstock
into cutterstock for use in the marine fuel market. We believe that continued improvements to our TCEP technology and investments in additional
technologies will enable us to upgrade feedstock into higher value end products, such as fuels and lubricating base oil, that command higher
market prices than the current re-refined products we produce.
Expand TCEP Re-Refinement Capacity. We intend to expand our TCEP capacity by building additional TCEP facilities to re-refine
feedstock. We believe the TCEP technology has a distinct competitive advantage over conventional re-refining technology because it produces a
high-quality, fuel oil product, and the capital expenditures required to build a TCEP processing plant are significantly lower than a comparable
conventional re-refining facility. By continuing the transition from our historical role as a value-added logistics provider to operating as a re-refiner,
we believe we will be able to leverage our feedstock supply network and aggregation capabilities to upgrade a larger percentage of our feedstock
inventory into higher value end products which we believe should lead to increased revenue and gross margins. We intend to build TCEP facilities
near the geographic location of substantial feedstock sources that we have relationships with through our existing operations or from an
acquisition. By establishing TCEP facilities near proven feedstock sources, we seek to lower our transportation costs and lower the risk of
operating plants at low capacity.
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 for the
implementation of TCEP. In addition, we intend to pursue further vertical integration opportunities by acquiring complementary recycling and
processing technologies where we can realize synergies by leveraging our customer and vendor relationships, infrastructure, and personnel, and
by eliminating duplicative overhead costs.
Alternative Energy Project Development. We will continue to evaluate and potentially pursue various alternative energy project
development opportunities. These opportunities may be a continuation of the projects sourced originally by World Waste and/or may include new
projects initiated by us.
Products and Services
We generate substantially all of our revenue from the sale of four product categories. All of these products are commodities that are
subject to various degrees of product quality and performance specifications.
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Used Motor Oil
Used motor oil is a petroleum-based or synthetic lubricant that contains impurities such as dirt, sand, water, and chemicals.
Fuel Oil
Fuel Oil is a distillate fuel which is typically blended with lower quality fuel oils. The distillation of used oil and other petroleum by-products
creates a fuel with low viscosity, as well as low sulfur, ash, and heavy metal content, making it an ideal blending agent.
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.
Gasoline Blendstock
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 plus.
Suppliers
We conduct business with a number of used oil generators, as well as a large network of suppliers that collect used oil from used oil
generators. In our capacity as a collector of used oil, we purchase feedstock from approximately 2,500 businesses, such as oil change service
stations, automotive repair shops, manufacturing facilities, petroleum refineries, and petrochemical manufacturing operations, which generate
used oil through their operations.
In our capacity as a broker of used oil, we work with approximately 50 suppliers that collect used oil from businesses such as those
mentioned above. We are party to four feedstock purchase agreements with separate third parties, pursuant to which such third parties have
agreed to supply us with feedstock. These agreements provide for us to purchase a range of volumes from the seller in the normal course of
business up to approximately 1.5 million gallons per month. These agreements operate on a month-to-month basis, and certain agreements
provide for a month-to-month extension after the termination date. The purchase price per gallon for each agreement is based on a discount to
the market price of certain average weekly oil prices listed on the “Platts Oilgram Price Report.” These feedstock purchase agreements
represented approximately 42% of the 42.4 million gallons of feedstock we aggregated during the twelve month period ending December 31,
2012.
In January 2012, the Company entered into an agreement to purchase used oil feedstock from a third party. The agreement provided for
the Company to purchase a minimum of 260,000 gallons of used oil feedstock per month at purchase prices based on a discount to the “Platt’s
Oilgram Price Report,” with such discount reviewed and agreed upon quarterly. The terms of the agreement stated that the agreement would
continue until February 28, 2012; and month to month thereafter unless terminated by either party with 30 days prior written notice, provided that
the agreement was extended in February 2013 through March 31, 2013, with an adjusted volume of 200,000 gallons per month, with such
discount reviewed and agreed upon quarterly.
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Customers
The Black Oil division sells used oil and other feedstock to numerous customers in the Gulf Coast and Midwest regions of the United
States. The primary customers of its products are blenders and industrial burners, as described above as well as re-refiners of the feedstock. The
Black Oil division is party to three feedstock sale agreements. The first feedstock sale agreement has a term that extends through June 30, 2014,
subject to the terms of the agreement. The agreement is also terminable by either party with 30 days’ notice of a material breach that is not
cured. The sale agreement requires that: (i) we provide between 8,000 and 22,000 barrels per calendar month of used oil product (“Recovery
Oil”) during the term of the agreement; (ii) that the buyer shall have the right of first refusal to purchase additional Recovery Oil from us, which is
procured within 300 miles of their current location; and (iii) that the buyer pay us a price per barrel equal to our direct costs, plus certain
commissions based on the quality and quantity of the Recovery Oil we supply. The second agreement requires us to sell a minimum of 36,000
gallons of Recovery Oil per week to the purchaser, has a term of one year expiring in January 2014, includes certain non-solicitation provisions
prohibiting the buyer from soliciting our customers and requires the buyer to pay us a price per gallon that is mutually negotiated on a week-to-
week basis.
The Refining and Marketing division does not rely solely on contracts, but also on the spot market to support the sale of its end products,
which are commodities.
We are party to a supply agreement which requires us to provide between 40,000 and 60,000 barrels of marine fuel cutterstock per month
to a separate buyer pursuant to a 24 month contract which expires in August 2014, which provides that the buyer pay us a price per gallon based
on a premium to the market price of certain average weekly oil prices listed on the “Platts Oilgram Price Report”.
Competition
The industrial waste and brokerage of petroleum products industries are highly competitive. There are numerous small to mid-size firms
that are engaged in the collection, transportation, treatment and brokerage of virgin and used petroleum products. Competitors include, but are
not limited to: Safety-Kleen, Inc., Rio Energy, Inc., Heckmann Corporation, Heritage-Crystal Clean, Inc., and FCC Environmental (formerly
Siemens Hydrocarbon Recovery Services). These competitors actively seek to purchase feedstock from local, regional and industrial collectors,
refineries, pipelines and other sources. Competition for these feedstocks may result in increasing prices to obtain used motor oil and transmix
feedstocks critical to the success of our business. In order to remain competitive, we must control costs and maintain strong relationships with our
feedstock suppliers. Our network of generators and collectors minimizes our reliance on any single supplier. A portion of the sales of the collected
and aggregated used motor oil product are based on supply contracts (as described above) which include a range of prices which change based
on feedstock quality specifications and volumes. This pricing structure helps to insulate us from inventory risk by ensuring a spread between costs
to acquire used motor oil feedstock and the revenues received for delivery of the feedstock. We believe that price and service are the main
competitive factors in the used motor oil collection industry. We believe that our ability to accept and transport large volumes of oil year round
gives us an advantage over many of our competitors. In addition, we believe that our storage capacity and ability to process the streams of
products we receive as well as our ability to transport the end product by barge, rail and truck provide further advantages over many of our
competitors.
Employees
We have 102 full-time employees. We believe that our relations with our employees are good.
Seasonality
The industrial hydrocarbon recovery business is seasonal to the extent that it is dependent on streams from seasonal industries. For
example, asphalt plants burn recycled waste oil in their process, placing pricing and supply availability constraints on the industry during the good
weather construction and road building seasons. In our current markets, road paving typically occurs from late spring to early fall. Therefore, it is
somewhat easier to procure certain waste streams during winter months when competition for used motor oil feedstock is historically not as
strong. Currently we are seeing increased demand for used motor oil feedstocks throughout the year due to the addition of re-refining
technologies in the marketplace.
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Regulation
We operate in a highly regulated and competitive environment that is subject to change, particularly in the area of environmental
compliance. Our operations are regulated by federal, state, county and, in some jurisdictions, city regulations.
Additionally, the U.S. Departments of Transportation, Coast Guard and Homeland Security as well as various federal, state, local and
foreign agencies exercise broad powers over our transportation operations, generally governing such activities as authorization to engage in
motor carrier operations, safety and permits to conduct transportation business. We may also become subject to new or more restrictive
regulations that the Departments of Transportation and Homeland Security, the Occupational Safety and Health Administration, the Environmental
Protection Agency or other authorities impose, including regulations relating to engine exhaust emissions, the hours of service that our drivers may
provide in any one time period, security and other matters.
Our compliance challenges arise from various legislative and regulatory bodies influenced by political, environmental, health and safety
concerns.
For example, changes in federal regulations relating to the use of methyl tertiary butyl ether and new sulfur limitations for product shipped
in domestic pipelines resulted in tightened specifications of gasoline blendstock that we were refining, causing a corresponding decrease in
revenue and gross margin growth during 2006, as compared to prior years. This change in regulation, as well as other emission-related
regulations, had a material impact on the entire petroleum industry, and we adapted and managed our operations by finding materials better
suited to comply with these regulations. As such, it is possible that future changes in federal regulations could have a material adverse effect on
our results from operations.
We must also obtain and maintain a range of federal, state and local permits for our various logistical needs as well as our planned
industrial processes.
Inflation and Commodity Price Risk
To date, our business has not been significantly affected by inflation. We purchase petroleum and petroleum by-products for consolidation
and delivery, as well as for our own refining operations. By virtue of constant changes in the market value of petroleum products, we are exposed
to fluctuations in both revenues and expenses. We do not currently engage in an active hedging program, as the inventory/finished product
turnover occurs within approximately four to six weeks, thereby limiting the timeline of potential exposure. The purchase of our used motor oil
feedstock tends to track with natural gas pricing due to the market’s typical practice of substituting used motor oil for natural gas as a fuel source
for various industrial processes. On the other hand, the prices of the products that may in the future be generated through the re-refining
processes that we hope to develop are expected to track with market pricing for marine diesel and vacuum-gas oil. The recent rise in oil prices
has increased the spread between the price of used motor oil, feedstock and re-refining end-products.
Recent Events
On January 1, 2013, the Company purchased two trucks, miscellaneous operating assets and a used oil collection customer base from a
used oil collection company in the Houston, Texas area. The portion of the acquired company was immediately integrated into the Company's
operations as part of the H&H Oil collection business.
Intellectual Property
We rely on a combination of patent, trademark, copyright and trade secret laws in the United States and other jurisdictions as well as
confidentiality procedures and contractual provisions to protect our proprietary technology, trade secrets, technical know-how and other
proprietary information. We also enter into confidentiality and invention assignment agreements with our employees.
We have filed 2 patents with the U.S. Patent and Trademark Office relating to our TCEP technology. We also have registered trademarks
for H&H Oil and Vertex Energy.
In addition, we have developed a website and have registered www.vertexenergy.com as our domain name, which contains information
we do not desire to incorporate by reference herein.
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ITEM 1A. Risk Factors
Investing in our common stock involves a high degree of risk. You should carefully consider each of the following risk factors and all of the
other information set forth in this filing, including our consolidated financial statements and related notes, before investing in our common stock.
The following risks and the risks described elsewhere in this filing, including in the section entitled “Management’s Discussion and Analysis of
Financial Condition and Results of Operations,” could materially harm our business, financial condition, future results and cash flow. If that occurs,
the trading price of our common stock could decline, and you could lose all or part of your investment.
GENERAL RISKS RELATING TO OUR COMPANY
We face risks associated with the integration of the businesses, assets and operations recently acquired from Vertex Holdings, L.P.
As described above under “Business” – “Recent Acquisition”, we recently acquired substantially all of the assets and operations of
Holdings. Those assets and operations included CMT, which operates a 19-acre bulk liquid storage facility on the Houston Ship Channel;
Crossroad, which is a transportation carrier that provides transportation and logistical services for liquid petroleum products, as well as other
hazardous materials and waste streams; Vertex Recovery which collects and recycles used oil and residual materials from large regional and
national customers throughout the U.S. and Canada; and H&H Oil, which collects and recycles used oil and residual materials from customers
based in Austin, Baytown, and Corpus Christi, Texas. These represented new business lines and operations for us and while our management
has significant prior experience in connection with the operations and management of these acquired businesses, we cannot assure you that we
will be able to successfully integrate the acquisitions into our operations or that such acquisitions will positively affect our operations and cash
flow. Acquisitions such as these involve numerous risks, including difficulties in the assimilation of the acquired businesses. The consolidation of
our operations with the operations of the acquired companies, including the consolidation of systems, procedures, personnel and facilities and the
achievement of anticipated cost savings, economies of scale and other business efficiencies presents significant challenges to our management.
The acquisition of the acquired businesses and/or our failure to successfully integrate the acquired businesses could have an adverse effect on
our liquidity, financial condition and results of operations.
We may be required to pay substantial additional amounts of consideration to Holdings in the event certain adjusted EBITDA targets
are met by us. There may also be actual or perceived conflicts of interest with management regarding such targets and amounts due in
connection therewith.
We acquired substantially all of the assets and liabilities of Holdings on September 11, 2012 pursuant to the Acquisition. Concurrent with
the closing of the transactions contemplated in the Acquisition, we paid the following purchase price (the “Purchase Price”) to Holdings, (a) $14.8
million in cash (less the escrow amount described below) and assumed debt; and (b) 4,545,455 restricted shares of our common stock; and to
B&S LP, approximately $1.7 million in cash, representing the appraised value of certain owned real property. Additionally, for each of the three
one-year periods following the closing date, Holdings will be eligible to receive earn-out payments of $2.23 million, up to $6.7 million in the
aggregate (the “Earn-Out Payments”), contingent on the combined company achieving adjusted EBITDA targets of $10.75 million, $12.0 million
and $13.5 million, respectively, in those periods. In the event we meet the required adjusted EBITDA targets and are required to pay Holdings the
Earn-Out Payments, it could have a material adverse effect on our liquidity, the funds we have available for future expansion and our results of
operations.
Holdings was a related party controlled by Benjamin P. Cowart, our President, Chairman and largest shareholder, who owned directly or
indirectly a 77% interest in Holdings. Additionally, Chris Carlson, our Chief Financial Officer, owns a 10% interest in Holdings and certain other of
our employees (including Greg Wallace, our Vice President of Refining and Marketing) had a beneficial ownership interest in Holdings. Due to the
structure of the earn-out payments, Mr. Cowart, Mr. Carlson and the other employees who will receive these payments have an incentive to
increase our EBITDA in the periods covered in order to facilitate earn-out payments. They may therefore have an incentive to take steps to
increase our EBITDA in the relevant periods at the expense of our future growth and long-term expansion. Consequently, the earn-out payments
and/or the structure thereof may cause actual or perceived conflicts of interest between Mr. Cowart, Mr. Carlson and certain of our other
employees, our company and our other shareholders.
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We have substantial indebtedness which could adversely affect our financial flexibility and our competitive position.
We have a significant amount of outstanding indebtedness. As of December 31, 2012, we owed approximately $8.9 million in accounts
payable. Additionally, on September 11, 2012, we entered into a Credit Agreement with Bank of America, N.A. (the “Lender”) effective as of
August 31, 2012 pursuant to which we borrowed a total of $8.5 million under a Term Note (the “Term Note”) and $8.75 million under a Revolving
Note, the majority of which funds were immediately used to pay Holdings the acquisition price and other expenses associated with the Acquisition
in September 2012. As of December 31, 2012, we owed $7.9 million under the Term Note and $6.75 million under the Revolving Note. Amounts
borrowed under the Term Note and Revolving Note (the “Revolving Note”, and together with the Term Note, the “Notes”) bear interest at our
option at the lesser of the Lender’s prime commercial lending rate then in effect or the LIBOR rate in effect plus 2.75%. Accrued and unpaid
interest on the Term Note is due and payable monthly in arrears and all amounts outstanding under the Term Note are due and payable on August
31, 2015. Additionally, payments of principal in the amount of $141,667 are due and payable on the Term Note, monthly in arrears on the last day
of each month beginning September 30, 2012, and continuing thereafter until the maturity date. Accrued and unpaid interest on the Revolving
Note is due and payable monthly in arrears and all amounts outstanding under the Revolving Note are due and payable on August 31, 2014.
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;
limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
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.
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We may need to raise additional funding in the future to repay or refinance the Term Note and Revolving Note 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 shareholders 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.
Our failure to comply with the covenants in the documents governing our existing and future indebtedness could materially adversely
effect our financial condition and liquidity.
In connection with the Credit Agreement evidencing the Term Note and Revolving Note, we agreed to comply with certain standard
affirmative and negative covenants and agreed to meet the following financial covenants at such time as any loans or other obligations are
outstanding under the Credit Agreement, commencing with the quarter ending September 30, 2012: (1) the ratio of (a) our EBITDA minus cash
taxes, minus distributions, minus unfinanced capital expenditures, in each case for the immediately preceding four fiscal-quarter periods, to (b) the
sum of our interest expense for the immediately preceding four fiscal-quarter period plus our current maturities of long-term debt, in each case, as
of the last day of such four fiscal-quarter period, all as determined in accordance with GAAP, may not at any time be less than 1.25 to 1.00
(calculated and tested quarterly); (2) the ratio of total debt funded under the Credit Agreement to our EBITDA cannot be greater than 2.00 to 1.00
(calculated and tested quarterly); and (3) the sum of our tangible net worth cannot be less than $10,000,000 as of the last day of each fiscal
quarter. While we were not in compliance with the tangible net worth requirement of the Credit Agreement as of September 30, 2012 and
December 31, 2012; the tangible net worth requirement was included in the Credit Agreement in error and we and the Lender entered into a
waiver and amendment agreement in January 2013, pursuant to which the Lender agreed to waive such prior non-compliance with the tangible
net worth requirement and to amend the Credit Agreement to remove such net tangible worth requirement moving forward.
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The Credit Agreement also includes customary events of default for facilities of similar nature and size as the Credit Agreement and also
provides that an event of default occurs if (a) Benjamin P. Cowart, our Chief Executive Officer, Chairman of the Board and largest shareholder,
ceases to be actively involved in the day-to-day management or operation of the Company or if Mr. Cowart ceases to own and control at least 25%
of the equity interests of the Company; (b) the Company ceases at any time to own and control 100% of the assets acquired from Holdings or
Vertex II GP, LLC (“Vertex GP”), a wholly-owned subsidiary of the Company formed for the purpose of the transaction, ceases to be the sole
general partner of the partnerships acquired; (c) an agreement, letter of intent, or agreement in principle is executed with respect to any proposed
transaction or event or series of transactions or events which, individually or in the aggregate, could reasonably be expected to result in either (a)
or (b), above; or (d) a default occurs under the lease agreement for certain premises leased by CMT.
A breach of any of the covenants above or covenants in future agreements, if uncured, could lead to an event of default under any such
document, which in some circumstances could give our creditors the right to demand that we accelerate repayment of amounts due. This would
likely in turn trigger cross-acceleration or cross-default rights in other documents governing our indebtedness. Therefore, in the event of any such
breach, we may need to seek covenant waivers or amendments from our creditors or seek alternative or additional sources of financing, and we
cannot assure you that we would be able to obtain any such waivers or amendments or alternative or additional financing on acceptable terms, if
at all. In addition, any covenant breach or event of default could harm our credit rating and our ability to obtain additional financing on acceptable
terms. The occurrence of any of these events could have a material adverse effect on our financial condition and liquidity.
Our obligations under the Credit Agreement and related Notes are secured by a first priority security interest in substantially all of our
assets.
Our obligations under the Credit Agreement and Notes are secured by a first priority security interest in substantially all of our assets,
including those assets and properties acquired in connection with the closing of the Acquisition, which was granted pursuant to Vertex Energy,
Inc. and certain of our subsidiaries’ entry into security agreements with the Lender. Additionally, substantially all of Vertex Energy, Inc.’s
subsidiaries agreed to guarantee Vertex Energy, Inc.’s obligations under the Credit Agreement. As such, if an event of default occurs under the
Credit Agreement, the Lender may enforce its security interest over our assets and/or our subsidiaries which secure the repayment of such
obligation, and we could be forced to curtail or abandon our current business plans and operations. If that were to happen, any investment in the
company could become worthless.
If we are unable to maintain a credit facility, it could have an adverse effect on our business.
We have historically been able to maintain lines of credit and other credit facilities similar to the Credit Agreement with the Lender. We
rely heavily on the availability and utilization of these lines of credit and credit facilities for our operations and for the purchase of inventory. If we
are unable to renew or replace our facility or are unable to borrow funds under such facility, either due to having no available funds remaining
under the facility and/or upon any default of the facility, we may be forced to curtail or abandon our current and/or future planned business
operations.
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We may be required to pay significant bonuses to our material employees.
Pursuant to our employment agreement, as amended, with Greg Wallace, our Vice President of Refining and Marketing, in the event we
earn “Adjusted Gross Margin” (equal to gross margin minus general and administrative overhead directly related to the segments of our Refining
and Marketing divisions which relate to business conducted in Port Arthur, Texas, and which are managed by Mr. Wallace and excluding TCEP),
for the years ended December 31, 2011, 2012, 2013 or 2014, we agreed to pay Mr. Wallace a bonus equal to 10% of such Adjusted Gross Margin
for each applicable year. For the year ended December 31, 2011, a total of $247,739 was due to Mr. Wallace which bonus was paid during
2012. Additionally, in the event that year-end Adjusted Gross Margin exceeds certain pre-approved thresholds ($2,477,393 in the 2012 year), Mr.
Wallace is able to earn an additional bonus equal to 5% of Adjusted Gross Margin. For the year ended December 31, 2012, a total of $343,630 is
due to Mr. Wallace, which is payable over fiscal 2013 pursuant to the agreement terms. We also agreed to pay Mr. Wallace a bonus of 15% of any
Adjusted Gross Margin for the year ended December 31, 2015. Mr. Wallace ceases to earn any bonuses upon such time as his employment with
us is terminated. As such, Mr. Wallace may have an incentive to take steps to increase Adjusted Gross Margin at the expense of our future
growth and long-term expansion. Consequently, Mr. Wallace’s bonus structure may cause actual or perceived conflicts of interest between Mr.
Wallace, us and our other shareholders. Payment of the bonuses to Mr. Wallace could have a material adverse effect on our liquidity, the funds
we have available for future expansion and our results of operations.
We incur significant costs as a result of operating as a fully reporting company in connection with Section 404 of the Sarbanes Oxley
Act, and our management is required to devote substantial time to compliance initiatives.
We incur significant legal, accounting and other expenses in connection with our status as a fully reporting public company. The
Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act") and rules subsequently implemented by the SEC have imposed various new
requirements on public companies, including requiring changes in corporate governance practices. As such, our management and other
personnel are required to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations increase our
legal and financial compliance costs and make some activities more time consuming and costly. In addition, the Sarbanes-Oxley Act requires,
among other things, that we maintain effective internal controls for financial reporting and disclosure of controls and procedures. Our testing may
reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses. Our compliance with Section 404
will require that we incur substantial accounting expense and expend significant management efforts. We may need to hire additional accounting
and financial staff with appropriate public company experience and technical accounting knowledge to comply with such compliance
requirements. Moreover, if we are not able to comply with the requirements of Section 404 in a timely manner, or if we identify deficiencies in our
internal controls over financial reporting that are deemed to be material weaknesses, the market price of our stock could decline, and we could be
subject to sanctions or investigations by the SEC or other regulatory authorities, which would require additional financial and management
resources.
RISKS RELATING TO OUR BUSINESS
Our contracts may not be renewed and our existing relationships may not continue, which could be exacerbated by the fact that a
limited number of our customers represented a significant portion of our sales.
Our contracts and relationships in the black oil business include feedstock purchasing agreements with local waste oil collectors, an off-
take arrangement with one re-refinery, along with a few key relationships in the bunkering, blending and No. 6 oil industry. Because our
operations are extremely dependent on the black oil key bunkering, blending and No. 6 oil relationships as well as our third-party refining
contracts, if we were to lose relationships, there would be a material adverse effect on our operations and results of operations. Additionally, if we
were to lose any of our current local waste oil collectors, we could be required to spend additional resources locating and providing incentives for
other waste oil collectors, which could cause our expenses to increase and/or cause us to curtail or abandon our business plans.
This is exacerbated by the fact that four companies represented approximately 31%, 25%, 13%, and 12% of our revenues and two
companies represented approximately 11% and 10% of outstanding purchases for the year ended December 31, 2012. As a result, if we were to
lose any of our largest revenue producing relationships, we may be forced to expend additional resources attempting to secure replacement
relationships, which may not be on as favorable terms as our current relationships, if such relationships can be secured at all.
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A significant portion of our historical revenues are a result of our agreement with KMTEX, which has expired to date, but which terms
the parties have continued to operate under.
We previously had an agreement in place with KMTEX, which specializes in the custom processing of petrochemicals and other
chemicals. Our services include terminal storage and expert project management in materials handling, distillation, filtration, molecular sieve, and
reaction chemistry, pursuant to which KMTEX agreed to process feedstock of certain petroleum distillates, which we provide to KMTEX to process
into more valuable feedstocks, including pygas, gasoline blendstock and cutterstock, which agreement expired on June 30, 2011, provided that
we believe that we will be able to renew or extend such agreement subsequent to the date of this Report as the parties have continued to operate
under the terms of the agreement subsequent to its expiration. If KMTEX were to terminate our relationship and/or not agree to renew our
agreement with it, we would be forced to spend resources attempting to locate another party which we could supply our feedstock which could
take substantial time, if such alternative party is even available. If we are able to find another contracting party, the terms of the understanding or
agreement with such contracting party may be on terms less favorable to us and/or may force us to transport our feedstock a greater distance. As
a result of the above, if we were to lose our relationship with KMTEX our expenses may increase, our results of operations may decrease and/or it
may cause us to curtail or abandon our business plans, all of which would likely cause the value of our securities to decrease in value.
We operate in competitive markets, and there can be no certainty that we will maintain our current customers or attract new customers
or that our operating margins will not be impacted by competition.
The industries in which we operate are highly competitive. We compete with numerous local and regional companies of varying sizes and
financial resources in our refining and feedstock consolidation operations, transportation services, feedstock collection and aggregation and used
oil recycling, and we compete with larger oil companies, with significantly greater resources than us, in our oil re-refining operations. We expect
competition to intensify in the future. Furthermore, numerous well-established companies are focusing significant resources on providing used oil
collection, transportation, refining and re-refining services that will compete with our services. We cannot assure you that we will be able to
effectively compete with these other companies or that competitive pressures, including possible downward pressure on the prices we charge for
our products and services, will not arise. In the event that we cannot effectively compete on a continuing basis, or competitive pressures arise,
such inability to compete or competitive pressures could have a material adverse effect on our business, results of operations and financial
condition.
Disruptions in the supply of feedstock could have an adverse effect on our business.
We depend on the continuing availability of raw materials, including feedstock, to remain in production. A serious disruption in supply of
feedstock, or significant increases in the prices of feedstock, could significantly reduce the availability of raw materials at our plant and which are
available to be processed by our third-party processors. Additionally, increases in production costs could have a material adverse effect on our
business, results of operations and financial condition.
For example, we have previously experienced difficulty in obtaining feedstock from our suppliers who, because of the sharp downturn in
the price of oil (used and otherwise) have seen their margins decrease substantially, which in some cases has made it uneconomical for such
suppliers to purchase feedstock from their suppliers and/or sell to us at the rates set forth in their contracts. Any similar decline in the price of oil
and/or the economy in general could create a decrease in the supply of feedstock, prevent us from maintaining our required levels of output
and/or force us to seek out additional suppliers of feedstock, who may charge more than our current suppliers, and therefore adversely affect our
results of operations.
We are subject to numerous environmental and other laws and regulations and, to the extent we are found to be in violation of any such
laws and regulations, our business could be materially and adversely affected.
We are subject to extensive federal, state, provincial and local laws and regulations relating to the protection of the environment which,
among other things:
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regulate the collection, transportation, handling, processing and disposal of hazardous and non-hazardous wastes;
impose liability on persons involved in generating, handling, processing, transporting or disposing hazardous materials;
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impose joint and several liability for remediation and clean-up of environmental contamination; and
require financial assurance that funds will be available for the closure and post-closure care of sites where hazardous wastes are
stored, processed or disposed.
The breadth and complexity of all of these laws and regulations impacting us make consistent compliance extremely difficult and often
result in increased operating and compliance costs, including requiring the implementation of new programs to promote compliance. Even with
these programs, we and other companies in the industry are routinely faced with legal and administrative proceedings which can result in civil and
criminal penalties, interruption of business operations, fines or other sanctions and require expenditures.
Our operations involve the risks of fuel spillage or seepage, environmental damage and hazardous waste disposal, among others. If we
are involved in a spill or other accident involving hazardous substances, or if we are found to be in violation of applicable environmental laws or
regulations, it could significantly increase our cost of doing business.
Additionally, under current law, we may be held liable for damage caused by conditions that existed before we acquired our assets and/or
before we took control of our leased properties or if we arranged for the transportation, disposal or treatment of hazardous substances that cause
environmental contamination. In the future, we may be subject to monetary fines, civil or criminal penalties, remediation, clean-up or stop orders,
injunctions, orders to cease or suspend certain practices or denial of permits required to operate our facilities and conduct our operations. The
outcome of any proceeding and associated costs and expenses could have a material adverse impact on our operations and financial condition.
Environmental laws and regulations are subject to change and may become increasingly stringent or relaxed. Interpretation or
enforcement of existing laws and regulations, or the adoption of new laws and regulations, may require us to modify or curtail our operations or
replace or upgrade our facilities or equipment at substantial costs which we may not be able to pass on to our customers. On the other hand, if
new laws and regulations are less stringent, then our customers or competitors may be able to compete with us more effectively, without reliance
on our services, which could decrease the need for our services and/or increase competition which could adversely affect our revenues and
profitability, if any.
We are required to obtain and maintain permits, licenses and approvals to conduct our operations in compliance with such laws and
regulations. If we are unable to maintain our currently held permits, licenses and approvals, we may not be able to continue certain of our
operations. If we are unable to obtain any additional permits, licenses and approvals which may be required as we expand our operations, we
may be forced to curtail or abandon our current and/or future planned business operations.
Environmental risks and regulations may adversely affect our business.
All phases of designing, constructing and operating our refining and planned re-refining plant present environmental risks and hazards. We
are subject to environmental regulation implemented or imposed by a variety of federal, state and municipal laws and regulations as well as
international conventions. Among other things, environmental legislation provides for restrictions and prohibitions on spills and discharges, as well
as emissions of various substances produced in association with our operations. Legislation also requires that facility sites be operated,
maintained, abandoned and reclaimed in such a way that would satisfy applicable regulatory authorities. Compliance with such legislation can
require significant expenditures and a breach could result in the imposition of fines and penalties, some of which could be material. Environmental
legislation is evolving in a manner we expect may result in stricter standards and enforcement, larger fines and liability, as well as potentially
increased capital expenditures and operating costs. The presence or discharge of pollutants in or into the air, soil or water may give rise to
liabilities to governments and third parties and may require us to incur costs to remedy such presence or discharge. If we are unable to remediate
such conditions economically or obtain reimbursement or indemnification from third parties, our financial condition and results of operations could
be adversely affected. We cannot assure you that the application of environmental laws to our business will not cause us to limit our production, to
significantly increase the costs of our operations and activities, to reduce the market for our products or to otherwise adversely affect our financial
condition, results of operations or prospects.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
We could be subject to involuntary shutdowns or be required to pay significant monetary damages or remediation costs if we are found
to be a responsible party for the improper handling or the release of hazardous substances.
As a company engaged in the sale, handling, transportation, storage, recycling and disposal of materials that are or may be classified as
hazardous by federal, state, provincial or other regulatory agencies, we face risks of liability for environmental contamination. The federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, or “CERCLA” or Superfund, and similar state
laws impose strict liability for clean-up costs on current or former owners and operators of facilities that release hazardous substances into the
environment, as well as on the businesses that generate those substances or transport them. As a potentially responsible party, or “PRP,” we may
be liable under CERCLA for substantial investigation and cleanup costs even if we operate our business properly and comply with applicable
federal and state laws and regulations. Liability under CERCLA may be joint and several, which means that if we were found to be a business with
responsibility for a particular CERCLA site, we could be required to pay the entire cost of the investigation and cleanup, even though we were not
the party responsible for the release of the hazardous substance and even though other companies might also be liable. Even if we are able to
identify who the other responsible parties might be, we may not be able to compel them to contribute to the remediation costs, or they might be
insolvent or unable to contribute due to lack of financial resources.
Our facilities and the facilities of our clients and third-party contractors may have generated, used, handled and/or disposed of hazardous
substances and other regulated wastes. Environmental liabilities could exist, including cleanup obligations at these facilities or at off-site locations,
which could result in future expenditures that cannot be currently quantified and which could materially reduce our profits. In addition, new
services or products offered by us could expose us to further environmental liabilities for which we have no historical experience and cannot
estimate our potential exposure to liabilities.
Penalties we may incur could impair our business.
Failure to comply with government regulations could subject us to civil and criminal penalties and may negatively affect the value of our
assets or our ability to conduct our business. We may also be required to take corrective actions, including, but not limited to, installing additional
equipment, which could require us to make substantial capital expenditures. We could also be required to indemnify our employees in connection
with any expenses or liabilities that they may incur individually in connection with regulatory action against us. These could result in a material
adverse effect on our prospects, business, financial condition and our results of operations.
We are dependent on third parties for the disposal of our waste streams.
We do not own any waste disposal sites. As a result, we are dependent on third parties for the disposal of waste streams. To date,
disposal vendors have met their requirements, but we cannot assure you that they will continue to do so. If for some reason our current disposal
vendors cannot perform up to standards, we may be required to replace them. Although we believe there are a number of potential replacement
disposal vendors that could provide such services, we may incur additional costs and delays in identifying and qualifying such replacements. In
addition, any mishandling of our waste streams by disposal vendors could expose us to liability. Any failure by disposal vendors to properly collect,
transport, handle or dispose of our waste streams could expose us to liability, damage our reputation and generally have a material adverse effect
on our business, financial condition or results of operations.
Worsening economic conditions and trends and downturns in the business cycles of the industries we serve and which provide
services to us would impact our business and operating results.
A significant portion of our customer base is comprised of companies in the chemical manufacturing and hydrocarbon recovery industries.
The overall levels of demand for our products, refining operations, and future planned re-refined oil products are driven by fluctuations in levels of
end-user demand, which depend in large part on general macroeconomic conditions in the U.S., as well as regional economic conditions. For
example, many of our principal consumers are themselves heavily dependent on general economic conditions, including the price of fuel and
energy, availability of affordable credit and capital, employment levels, interest rates, consumer confidence and housing demand. These cyclical
shifts in our customers’ businesses may result in fluctuations in demand, volumes, pricing and operating margins for our services and products.
In addition to our customers, the suppliers of our feedstock may also be affected by downturns in the economy and adverse changes in
the price of feedstock. For example, we previously experienced difficulty obtaining feedstock from our suppliers who, because of the sharp
downturn in the price of oil (used and otherwise) have seen their margins decrease substantially, which in some cases have made it uneconomical
for such suppliers to purchase feedstock from their suppliers and/or sell to us at the rates set forth in their contracts. Any similar decline in the
price of oil and/or the economy in general could create a decrease in the supply of feedstock, prevent us from maintaining our required levels of
output and/or force us to seek additional suppliers of feedstock, who may charge more than our current suppliers, and therefore adversely affect
our results of operations.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Our operating margins and profitability may be negatively impacted by changes in fuel and energy costs.
We transport our refined oil and re-refined oil, with trucks and by rail. As a result, increases in shipping and transportation costs caused by
increases in oil, gasoline and diesel prices have a significant impact on our operating expenses. The price and supply of oil and gas is
unpredictable and fluctuates based on events beyond our control, including geopolitical developments, natural disasters, supply and demand for
oil and natural gas, actions by OPEC and other oil and gas producers, war and unrest in oil producing countries, regional production patterns and
environmental concerns. A significant increase in transportation or fuel costs could lower our operating margins and negatively impact our
profitability.
Additionally, the price at which we sell our refined oil and our re-refined oil is affected by changes in certain oil indexes. If the relevant oil
index rises, we anticipate being able to increase the prices for our refined and re-refined oil. If the relevant oil index declines, we anticipate having
to reduce prices for our refined and re-refined oil. However, the cost to collect used oil and refinery feedstock, including the amounts that must be
paid to obtain used oil and feedstock, generally also increases or decreases when the relevant index increases or decreases. Even though the
prices that can be charged for our refined and re-refined products and the costs to collect, refine, and re-refine the feedstock generally increase
and decrease together, we cannot assure you that when the costs to collect, refine and re-refine used oil and petrochemical products increase, we
will be able to increase the prices we charge for our refined and re-refined products to cover such increased costs, or that the costs to collect,
refine and re-refine used oil and petrochemical products will decline when the prices we can charge for our products declines. If the prices we
charge for our finished products and the costs to collect, refine and re-refine products do not move together or in similar magnitudes, our
profitability may be materially and negatively impacted.
Our strategy includes pursuing acquisition, partnerships and joint ventures and our potential inability to successfully integrate newly-
acquired companies or businesses, or successfully manage our partnerships and joint ventures may adversely affect our financial
results.
In the future, we may seek to grow our business by investing in new or existing facilities or technologies, making acquisitions or entering
into partnerships and joint ventures. Acquisitions, partnerships, joint ventures or investments may require significant managerial attention, which
may divert management from our other activities and may impair the operation of our existing businesses. Any future acquisitions of businesses or
facilities could entail a number of additional risks, including:
·
·
·
·
·
·
·
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the failure to successfully integrate the acquired businesses or facilities or new technology into our operations;
incurring significantly higher than anticipated capital expenditures and operating expenses;
disrupting our ongoing business;
dissipating our management resources;
failing to maintain uniform standards, controls and policies;
the inability to maintain key pre-acquisition business relationships;
loss of key personnel of the acquired business or facility;
exposure to unanticipated liabilities; and
the failure to realize efficiencies, synergies and cost savings.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Additionally, any properties or facilities that we acquire may be subject to unknown liabilities, such as undisclosed environmental
contamination, for which we would have no recourse, or only limited recourse, to the former owners of such properties. As a result, if a liability
were asserted against us based upon ownership of an acquired property, we might be required to pay significant sums to settle it, which could
adversely affect our financial results and cash flow.
The consolidation of our operations with the operations of acquired companies, including the consolidation of systems, procedures,
personnel and facilities, the relocation of staff, and the achievement of anticipated cost savings, economies of scale and other business
efficiencies, presents significant challenges to our management, particularly if several acquisitions occur at the same time. Fully integrating an
acquired company or business into our operations may take a significant amount of time. We cannot assure you that we will be successful in
overcoming these risks or any other problems encountered with acquisitions. To the extent we do not successfully avoid or overcome the risks or
problems related to any acquisitions, our results of operations and financial condition could be adversely affected. Future acquisitions also could
impact our financial position and capital needs, and could cause substantial fluctuations in our quarterly and yearly results of operations.
Acquisitions could include significant goodwill and intangible assets, which may result in future impairment charges that would reduce our stated
earnings or increase our stated losses.
We may be subject to citizen opposition and negative publicity due to public concerns over hazardous waste and re-refining
operations, which could have a material adverse effect on our business, financial condition or results of operations.
There currently exists a high level of public concern over hazardous waste and refining and re-refining operations, including with respect to
the location and operation of transfer, processing, storage and disposal facilities. Part of our business strategy is to increase our re-refining
capacity through the construction of new facilities in growth markets. Zoning, permit and licensing applications and proceedings, as well as
regulatory enforcement proceedings, are all matters open to public scrutiny and comment. Accordingly, from time to time we may be subject to
citizen opposition and publicity which may damage our reputation and delay or limit the planned expansion and development of future facilities or
operations or impair our ability to renew existing permits, any of which could prevent us from implementing our growth strategy and have a
material adverse effect on our business, financial condition or results of operations.
We depend heavily on the services of our Chief Executive Officer and Chairman, Benjamin P. Cowart.
Our success depends heavily upon the personal efforts and abilities of Benjamin P. Cowart, our Chief Executive Officer and Chairman,
who is employed by us under a five-year employment contract expiring on April 16, 2014. We do not currently have any “key man” life insurance
policy in place for Mr. Cowart. The loss of Mr. Cowart or other key employees could have a material adverse effect on our business, results of
operations or financial condition. In addition, the absence of Mr. Cowart may force us to seek a replacement who may have less experience or
who may not understand our business as well, or we may not be able to find a suitable replacement.
Unanticipated problems or delays in building our facilities to the proper specifications may harm our business and viability.
Our future growth will depend on our ability to timely and economically complete and operate TCEP and our other planned re-refining
facilities and operate our existing refining operations. If our operations are disrupted or our economic integrity is threatened for unexpected
reasons, our business may experience a substantial setback. Moreover, the occurrence of significant unforeseen conditions or events in
connection with the construction of our planned facilities may require us to reexamine our business model. Any change to our business model or
management’s evaluation of the viability of our planned services may adversely affect our business. Construction costs for our future facilities may
also increase to a level that would make a new facility too expensive to complete or unprofitable to operate. 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, any
of which could prevent us from beginning or completing construction or commencing operations at our future planned re-refining facilities.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Strategic relationships on which we rely are subject to change.
Our ability to identify and enter into commercial arrangements with feedstock suppliers and refined and re-refined oil clients depends on
developing and maintaining close working relationships with industry participants. Our success in this area also depends on our ability to select
and evaluate suitable projects as well as to consummate transactions in a highly competitive environment. These factors are subject to change
and may impair our ability to grow.
Disruptions to infrastructure and our and our partner’s facilities could materially and adversely effect our business.
Our business depends on the continuing availability of road, railroad, port, storage and distribution infrastructure and our re-refining
facilities. Any disruptions in this infrastructure network or such re-refining facilities, whether caused by labor difficulties, earthquakes, storms, other
natural disasters, human error or malfeasance or other reasons, could have a material adverse effect on our business. We rely on third parties to
maintain the rail lines from our plants to the national rail network, and any failure by these third parties to maintain the lines could impede the
delivery of products, impose additional costs and could have a material adverse effect on our business, results of operations and financial
condition. For example, previous damage to CMT as a result of Hurricane Ike in 2008 (which caused the terminal to temporarily be out of
operation) resulted in increased costs associated with the shipping of feedstock through third-party contractors, thereby raising the overall cost of
the feedstock and lowering our margins. Additional hurricanes or natural disasters in the future could cause similar damage to our infrastructure,
prevent us from generating revenues while such infrastructure is undergoing repair (if repairable) and/or cause our margins and therefore our
results of operations to be adversely affected.
Additionally, we have occasionally had to take our TCEP facility offline to refurbish and upgrade such facility. Any prolonged period during
which the TCEP facility is non-operational or operational on a limited basis due to the decision to refurbish or upgrade such facility, or any other
reason, including problems with the facility, could adversely affect our revenues and results of operations. Furthermore, any period during which
KMTEX’s facilities are offline could have an adverse effect on our revenues, force us to seek alternative re-refining facilities (which may be more
expensive or require us to transport our feedstock over longer distances) and may increase our expenses, decreasing our operating margins.
Negative publicity may harm our operations and we may face additional expenses due to such negative publicity.
Only a relatively small number of entities operate in our industry including competitors, feedstock suppliers, re-refining operators,
purchasers of our products and transportation companies. If issues arise with our products or third parties (including entities which operate in our
industry) allege issues with our products, even if no issues with such products exist, such negative publicity may force us to change service
providers, undertake certain transportation activities ourselves, at higher costs than third parties would charge, or cause certain of our buyers,
sellers or service providers to cease working with us. The result of such actions may result in our expenses increasing, a decrease in our ability to
purchase feedstock, or our ability to sell or transport our resulting products, which could cause our revenues to decrease and/or expenses to
increase, which could cause a material adverse effect on our results of operations.
Our commercial success will depend in part on our ability to obtain and maintain protection of our intellectual property.
Our success will depend in part on our ability to maintain or obtain and enforce patent rights and other intellectual property protection for
our technologies, to preserve our trade secrets, and to operate without infringing upon the proprietary rights of third parties. We have not obtained
patents (although two patent applications for our TCEP are pending) in the United States or internationally for our technology to date. We cannot
assure you that the TCEP patent will be granted, that if we file additional patent applications for our technologies in the future, such patents will be
granted or that the scope of any claims granted in any patent will provide us with proprietary protection or a competitive advantage. Furthermore,
we cannot assure you that if granted, such patents will be valid or will afford us with protection against competitors with similar technology. The
failure to obtain or maintain patents or other intellectual property protection on the technologies underlying our technologies may have a material
adverse effect on our competitive position and business prospects. It is also possible that our technologies may infringe on patents or other
intellectual property rights owned by others. We may have to alter our products or processes, pay licensing fees, defend an infringement action or
challenge the validity of the patents in court, or cease activities altogether because of patent rights of third parties, thereby causing additional
unexpected costs and delays to it. We cannot assure you that a license will be available to us, if at all, upon terms and conditions acceptable to us
or that we will prevail in any intellectual property litigation. Intellectual property litigation is costly and time consuming, and we cannot assure you
that we will have sufficient resources to pursue such litigation. If we do not obtain a license under such intellectual property rights, are found liable
for infringement or are not able to have such patents declared invalid, we may be liable for significant money damages and may encounter
significant delays in bringing products to market.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Competition may impair our success.
New technologies may be developed by others that could compete with our refining and re-refining technologies. In addition, we face
competition from other producers of oil substitutes and related products. Such competition is expected to be intense and could significantly drive
down the price for our products. Competition will likely increase as prices of energy in the commodities market, including refined and re-refined oil,
rise. Additionally, new companies are constantly entering the market, thus increasing the competition even further. These companies may have
greater success in the recruitment and retention of qualified employees, as well as in conducting their own refining and re-refining operations, and
may have greater access to feedstock, market presence, economies of scale, financial resources and engineering, technical and marketing
capabilities, which may give them a competitive advantage. In addition, actual or potential competitors may be strengthened through the
acquisition of additional assets and interests. If we are unable to compete effectively or adequately respond to competitive pressures, this may
materially adversely effect our results of operations and financial condition and could also have a negative impact on our ability to obtain additional
capital from investors.
Potential competition from our existing employees could negatively impact our profitability.
Although Mr. Cowart and other employees of ours are prohibited from competing with us (i) while they are employed with us and for six
months thereafter, and (ii) in the business of transporting, storing, processing and refining petroleum products, crudes and lubricants in the states
of Alabama, Arkansas, Arizona, California, Florida, Georgia, Iowa, Illinois, Kentucky, Louisiana, Michigan, North Carolina, Nevada, New York,
Ohio, Oklahoma, Pennsylvania, South Carolina, Tennessee and Texas, until August 31, 2017, none of such individuals will be prohibited from
competing with us after such six-month period ends, subject to the non-competition restriction expiring August 31, 2017. Accordingly, any of these
individuals could be in a position to use industry experience gained while working with us to compete with us. Such competition could increase
our costs to obtain feedstock, and increase our costs for contracting use of operating assets and services such as third-party refining capacity,
trucking services or terminal access. Furthermore, such competition could distract or confuse customers, reduce the value of our intellectual
property and trade secrets, or result in a reduction in the prices we are able to obtain for our finished products. Any of the foregoing could reduce
our future revenues, earnings or growth prospects.
Competition due to advances in renewable fuels may lessen the demand for our products and negatively impact our profitability.
Alternatives to petroleum-based products and production methods are continually under development. For example, a number of
automotive, industrial and power generation manufacturers are developing alternative clean power systems using fuel cells or clean-burning
gaseous fuels that may address increasing worldwide energy costs, the long-term availability of petroleum reserves and environmental concerns,
which if successful could lower the demand for our services. If these non-petroleum based products and oil alternatives continue to expand and
gain broad acceptance such that the overall demand for our products is reduced, we may not be able to compete effectively in the marketplace.
We will rely on new technology to conduct our business, including TCEP, and our technology could become ineffective or obsolete.
We will be required to continually enhance and update our technology to maintain our efficiency and to avoid obsolescence. Our TCEP is
currently commercially unproven and may not work over the long term in a profitable manner. Currently TCEP is producing at expected levels and
producing the quality of product we originally planned to produce. However, the total revenues year to date generated by the process have been
below our expectations, and we anticipate that TCEP will be able to continue producing the level and quality of product we originally hoped and
that our results of operations will reflect such levels of production as we move forward.
Additionally, the costs moving forward of enhancing and updating and/or replicating our technology may be substantial and may be higher
than the costs that we anticipated for technology maintenance and development. If we are unable to maintain the efficiency of our technology or
replicate our technology, our ability to manage our business and to compete may be impaired. Even if we are able to maintain technical
effectiveness, our technology may not be the most efficient means of reaching our objectives, in which case we may incur higher operating costs
than we would if our technology was more effective. The impact of technical shortcomings, including but not limited to the failure of TCEP, and/or
the costs associated with enhancing or replicating TCEP could have a material adverse effect on our prospects, business, financial condition, and
results of operations.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Our operations would be negatively affected if we are unable to use the TCEP facility in the future.
If we were not able to use our currently operational TCEP facility moving forward, our ability to compete in the marketplace would be
negatively affected. We believe we need the use of the TCEP facility to produce higher valued products from Black Oil streams and to compete
with competitors who may bring new technologies to the marketplace to create new and higher value finished products, which will in turn enable
them to pay more for feedstock (i.e., as their margins increase, they are able to increase the prices they are willing to pay for feedstock). If we are
unable to use the TCEP facility for any reason, we will not be able to effectively compete with additional technologies brought to market by our
competitors, our finished products could be worth less and if our competitors are willing to pay more for feedstock than we are, they could drive up
prices, which would cause our revenues to decrease, and cause our cost of sales to increase, respectively. Additionally, if we are forced to pay
more for feedstock, our cash flows will be negatively impacted and our margins will decrease.
Our business is subject to local, legal, political, and economic factors which are beyond our control.
We believe that the current political environment for construction of our planned additional re-refining facilities is sufficiently supportive to
enable us to plan and implement the construction of such additional re-refining facilities, funding permitting, of which there can be no assurance.
However, there are risks that conditions will change in an adverse manner. These risks include, but are not limited to, environmental issues, land
use, air emissions, water use, zoning, workplace safety, restrictions imposed on the re-refining industry such as restrictions on production,
substantial changes in product quality standards, restrictions on feedstock supply, price controls and export controls. Any changes in financial
incentives, investment regulations, policies or a shift in political attitudes are beyond our control and may adversely affect our business, plans for
future re-refining facilities, and future financial results.
Additionally, the U.S. Departments of Transportation, Coast Guard and Homeland Security and various federal, state, local and foreign
agencies exercise broad powers over our transportation operations, generally governing such activities as authorization to engage in motor carrier
operations, safety and permits to conduct transportation business. We may also become subject to new or more restrictive regulations that the
Departments of Transportation and Homeland Security, the Occupational Safety and Health Administration, the Environmental Protection Agency
or other authorities impose, including regulations relating to engine exhaust emissions, the hours of service that our drivers may provide in any
one-time period, security and other matters. Compliance with these regulations could increase our costs and adversely affect our results of
operations.
Our business may be harmed by anti-terrorism measures.
In the aftermath of the terrorist attacks on the United States and increased concerns regarding future terrorist attacks, federal, state and
municipal authorities have implemented and are implementing various security measures, including checkpoints and travel restrictions on large
trucks. Although many companies will be adversely affected by any slowdown in the availability of freight transportation, the negative impact could
affect our business disproportionately. For example, if the security measures disrupt or impede the timing of our deliveries of feedstock, we may
not have sufficient feedstock to run our re-refining process at full capacity, or may incur increased expenses to do so. We cannot assure you that
these measures will not significantly increase our costs and reduce our operating margins and income.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Our business is geographically concentrated and is therefore subject to regional economic downturns.
Our operations and customers are concentrated principally in the Gulf Coast. Therefore, our business, financial condition and results of
operations are susceptible to regional economic downturns and other regional factors, including state regulations and budget constraints and
severe weather conditions. In addition, as we seek to expand in our existing markets, opportunities for growth within this region may become
more limited and the geographic concentration of our business may increase.
Currently pending or future litigation or governmental proceedings could result in material adverse consequences, including judgments
or settlements.
From time to time, we are involved in lawsuits, regulatory inquiries and may be involved in governmental and other legal proceedings
arising out of the ordinary course of our business. Many of these matters raise difficult and complicated factual and legal issues and are subject to
uncertainties and complexities. The timing of the final resolutions to these types of matters is often uncertain. Additionally, the possible outcomes
or resolutions to these matters could include adverse judgments or settlements, either of which could require substantial payments, adversely
affecting our results of operations and liquidity.
If we cannot maintain adequate insurance coverage, we will be unable to continue certain operations.
Our business exposes us to various risks, including claims for causing damage to property and injuries to persons that may involve
allegations of negligence or professional errors or omissions in the performance of our services. Such claims could be substantial. We believe that
our insurance coverage is presently adequate and similar to, or greater than, the coverage maintained by other similarly situated companies in the
industry. If we are unable to obtain adequate or required insurance coverage in the future, or if such insurance is not available at affordable rates,
we could be in violation of our permit conditions and other requirements of the environmental laws, rules and regulations under which we operate.
Such violations could render us unable to continue certain of our operations. These events could result in an inability to operate certain assets and
significantly impair our financial condition.
Our insurance policies do not cover all losses, costs or liabilities that we may experience.
We maintain insurance coverage, but these policies do not cover all of our potential losses, costs or liabilities. We could suffer losses for
uninsurable or uninsured risks, or in amounts in excess of our existing insurance coverage, which would significantly affect our financial
performance. Our insurance policies also have deductibles and self-retention limits that could expose us to significant financial expense. Our
ability to obtain and maintain adequate insurance may be affected by conditions in the insurance market over which we have no control. The
occurrence of an event that is not fully covered by insurance could have a material adverse effect on our business, financial condition and results
of operations. In addition, our business requires that we maintain various types of insurance. If such insurance is not available or not available on
economically acceptable terms, our business would be materially and adversely affected.
Claims above our insurance limits, or significant increases in our insurance premiums, may reduce our profitability.
We currently employ 29 full-time and two part-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
$10,000,000. However, 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.
Increases in energy costs will affect our operating results and financial condition.
Our production costs will be dependent on the costs of the energy sources used to run our facilities and to procure feedstock. These costs
are subject to fluctuations and variations, and we may not be able to predict or control these costs. If these costs exceed our expectations, this
may adversely affect our results of operations.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Fluctuations in fuel costs could impact our operating expenses and results.
We operate a fleet of transportation, collection and aggregation trucks to collect and transport used oil and re-refined oil products, among
other things. The price and supply of fuel is unpredictable and fluctuates based on events beyond our control, including, among others,
geopolitical developments, supply and demand for oil and gas, actions by the Organization of the Petroleum Exporting Countries and other oil and
gas producers, war and unrest in oil producing countries and regional production patterns. We have experienced increases in the cost of fuel over
the past several years. Although in the past, we have been able to pass-through some of these costs to our customers, we cannot assure you that
we will be able to continue to do so in the future. Fuel or other transportation costs may continue to increase significantly in fiscal year 2013 and
beyond. A significant increase in our fuel or other transportation costs could lower our operating margins and negatively impact our profitability.
We face competition from other common carriers and transportation providers.
Crossroad Carriers is a common carrier that provides transportation and logistical services for liquid petroleum products, as well as other
hazardous materials and waste streams. We face competition from trucking companies, railroads, motor carriers and, to a lesser extent, ships and
barges. In addition to price competition, we face competition with respect to transit times and quality and reliability of service. Any future
improvements or expenditures materially increasing the quality or reducing the cost of alternative modes of transportation, and/or increased
competition from competitors, including competitors with more resources than us, could have a material adverse effect on our results of
operations, financial condition, and liquidity. Additionally, any future consolidation of the trucking industry could materially affect the competitive
environment in which we operate.
Our ability to use our net operating loss carryforwards may be subject to limitation.
Under Section 382 of the Internal Revenue Code of 1986, as amended, substantial changes in our ownership may limit the amount of net
operating loss carryforwards that could be utilized annually in the future to offset our taxable income. Specifically, this limitation may arise in the
event of a cumulative change in ownership of our company of more than 50% within a three-year period. Any such annual limitation may
significantly reduce the utilization of our net operating loss carryforwards before they expire. Transactions that may occur in the future may trigger
an ownership change pursuant to Section 382, and prior transactions may be deemed to have triggered an ownership change pursuant to Section
382, the result of which could limit the amount of net operating loss carryforwards that we can utilize annually to offset our taxable income, if any.
Any such limitation could have a material adverse effect on our results of operations.
Our Chief Executive Officer has significant voting control over us, including the appointment of Directors.
RISKS RELATED TO OUR SECURITIES
Due to Mr. Cowart’s beneficial ownership of approximately 46.1% of our common stock and 42.6% of our total voting stock, Mr. Cowart
exercises significant control in determining the outcome of corporate transactions or other matters, including the election of Directors, mergers,
consolidations, the sale of all or substantially all of our assets, and also the power to prevent or cause a change in control. The interests of Mr.
Cowart may differ from the interests of the other stockholders and thus result in corporate decisions that are adverse to other shareholders.
Our obligation to make earn-out payments in connection with our acquisition of Vertex Acquisition Sub, LLC in August 2012 may
prevent a change of control of us.
Our obligations regarding the earn-out payments could also prevent a change of control of us since a possible buyer may not be interested
in making these earn-out payments. The existence of the requirement to pay the earn-out payments could also cause the value of our common
stock to decline and/or be valued at less than a similarly sized company that does not have a required earn-out payment structure in place.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Securities analysts may not cover our common stock and this may have a negative impact on our common stock’s market price.
The trading market for our common stock will depend, in part, on the research and reports that securities or industry analysts publish
about us or our business. We do not have any control over these analysts. We do not currently have and may never obtain research coverage by
securities and industry analysts. If no securities or industry analysts commence coverage of us, the trading price for our common stock would be
negatively impacted. If we obtain securities or industry analyst coverage and if one or more of the analysts who covers us downgrades our
common stock, changes their opinion of our shares or publishes inaccurate or unfavorable research about our business, our stock price would
likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our common stock
could decrease and we could lose visibility in the financial markets, which could cause our stock price and trading volume to decline.
Shareholders may be diluted significantly through our efforts to obtain financing and satisfy obligations through the issuance of
additional shares of our common stock.
Wherever possible, our Board of Directors will attempt to use non-cash consideration to satisfy obligations. In many instances, we believe
that the non-cash consideration will consist of restricted shares of our common stock or warrants to purchase shares of our common stock. Our
Board of Directors has authority, without action or vote of the shareholders, but subject to NASDAQ rules and regulations (which generally require
shareholder approval for any transactions which would result in the issuance of more than 20% of our then outstanding shares of common stock
or voting rights representing over 20% of our then outstanding shares of stock), to issue all or part of the authorized but unissued shares of
common stock or warrants to purchase such shares of common stock. In addition, we may attempt to raise capital by selling shares of our
common stock, possibly at a discount to market in the future. These actions will result in dilution of the ownership interests of existing
shareholders, may further dilute common stock book value, and that dilution may be material. Such issuances may also serve to enhance existing
management’s ability to maintain control of us, because the shares may be issued to parties or entities committed to supporting existing
management.
We currently have a sporadic, illiquid and volatile market for our common stock, the market for our common stock is and may remain
sporadic, illiquid and volatile in the future.
We currently have a highly sporadic, illiquid and volatile market for our common stock, which market is anticipated to remain sporadic,
illiquid and volatile in the future, and will likely be subject to wide fluctuations in response to several factors, including, but not limited to:
·
·
·
·
·
actual or anticipated variations in our results of operations;
our ability or inability to generate revenues;
the number of shares in our public float;
increased competition; and
conditions and trends in the market for oil refining and re-refining services, transportation services and oil feedstock.
Our common stock is currently listed on the NASDAQ Capital Markets. 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. Due to the limited
volume of our shares which trade, we believe that our stock prices (bid, ask and closing prices) may not be related to our actual value, and 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 us, and should not rely on the publicly quoted or traded stock prices in determining our common stock value, but should instead
determine the value of our common stock based on the information contained in our public reports, industry information, and those business
valuation methods commonly used to value private companies.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The market price of our common stock historically has been volatile.
The market price of our common stock historically has fluctuated significantly based on, but not limited to, such factors as general stock
market trends, announcements of developments related to our business, actual or anticipated variations in our operating results, our ability or
inability to generate new revenues, and conditions and trends in the industries in which our customers are engaged.
In recent years, the stock market in general has experienced extreme price fluctuations that have oftentimes been unrelated to the
operating performance of the affected companies. Similarly, the market price of our common stock may fluctuate significantly based upon factors
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.
We do not intend to pay cash dividends on our common stock in the foreseeable future, and therefore only appreciation of the price of
our common stock will provide a return to our stockholders.
We currently anticipate that we will retain all future earnings, if any, to finance the growth and development of our business. We do not
intend to pay cash dividends in the foreseeable future. Any payment of cash dividends will depend upon our financial condition, capital
requirements, earnings and other factors deemed relevant by our Board of Directors. As a result, only appreciation of the price of our common
stock, which may not occur, will provide a return to our stockholders.
We have established preferred stock which can be designated by the Board of Directors without shareholder approval and have
established Series A preferred stock, which gives the holders a liquidation preference and the ability to convert such shares into our
common stock.
We have 50,000,000 shares of preferred stock authorized, which includes 5,000,000 shares of designated Series A preferred stock of
which approximately 1.4 million shares are issued and outstanding as of March 18, 2013, and 2,000,000 designated shares of Series B preferred
stock, of which no shares are outstanding as of the date of this Report. The Series A preferred stock has a liquidation preference of $1.49 per
share. As a result, if Vertex were to dissolve, liquidate or sell its assets, the holders of our Series A preferred stock would have the right to receive
up to the first approximately $2.13 million in proceeds from any such transaction. Consequently, holders of our common stock may receive less
consideration or no consideration in connection with such a transaction. Furthermore, the conversion of Series A preferred stock into common
stock may cause substantial dilution to our common shareholders. Additionally, because our Board of Directors is entitled to designate the powers
and preferences of the preferred stock without a vote of our shareholders, subject to NASDAQ rules and regulations, our shareholders will have no
control over what designations and preferences our future preferred stock, if any, will have.
ITEM 1B. Unresolved Staff Comments
Not applicable.
ITEM 2. Properties
Properties and Facilities
The Company owns three oil collection facilities operated by H&H Oil, which are located in Houston, Austin, and Corpus Christi,
Texas. The three owned locations range from 2 acres to 5 acres in area and have offices, storage tank facilities, small warehouse facilities for
operations and yard areas for the parking of trucks.
In addition, the Company leases two smaller facilities, one located in San Antonio and one in Edinburg, Texas, each with a small yard for
the parking of trucks, small storage tanks and an office. The San Antonio facility is leased under a thirty-six month lease expiring in June 2013
(subject to our right to renew the lease for an additional twelve months and/or purchase the property at the end of the lease term), which has a
rental cost of $2,500 per month. The Edinburg lease has a term expiring on November 1, 2014, and a rental cost of $400 per month.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The Company leases a 19 acre tank terminal facility in Baytown, Texas, where it aggregates the majority of the used motor oil for its
TCEP technology. The TCEP technology is located on-site at this facility, which also has facilities for the loading and unloading of trucks and
barges located near the Houston Ship Channel. The lease relating to this facility expires on November 1, 2017. The monthly rent relating to this
facility is approximately $14,978 per month during the remaining term of the lease. The lease contains a provision providing the landlord the right
to buy out our rights under the lease for the fair market value of such rights (as provided in the lease agreement) upon the occurrence of any
change of control of the Company, including the sale of substantially all of our assets; or our merger with another entity which results in our
shareholders holding less than 50% of the voting stock of the post-merger entity. Additionally, we have a right of first refusal to buy the landlord’s
interest in the property leased in the event the landlord receives a bona fide offer to sell the premises and notifies us of its intent to accept such
offer.
We also lease approximately 5,893 square feet of office space at our current principal executive office located at 1331 Gemini St., Suite
250, Houston, Texas 77058, pursuant to a lease we acquired from Holdings as part of the Acquisition. The office rent is $9,723 per month from
July 1, 2012 to June 30, 2013; $10,067 per month from July 1, 2013 to June 30, 2015; and $10,411 from July 1, 2015 to June 30, 2017, and the
lease expires on June 30, 2017.
We believe that our current facilities are suitable and adequate to meet our current needs, and that suitable additional or substitute space
will be available as needed.
ITEM 3. 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.
On July 28, 2011, Buffalo Marine Service, Inc. (“Buffalo”) filed a complaint against Trafigura AG d/b/a Trafigura AG Inc. (“Trafigura”),
KMTEX, Ltd. (“KMTEX”) and the Company in the United States District Court for the Southern District of Texas (Civil Action No. 4:11-cv-02544).
The current complaint alleges that certain maritime liquid cargo transported by Buffalo (as an operator of barges) contaminated Buffalo’s
barges, which, in turn, caused damage to other vessels who later received other cargo from the same Buffalo barges. The cargo was initially
located at KMTEX’s facility, sold by the Company to Trafigura, and then transported by Buffalo. The causes of actions set forth in the complaint
include Breach of Contract against Trafigura, Breach of Warranty and Negligence against Trafigura, KMTEX and the Company.
The total amount of damages claimed by Buffalo as to all parties is approximately $10,000,000. While the Company believes that
Buffalo’s claims are without merit, any damages awarded would be reduced by the percentage of negligence of all other other parties, including
Buffalo. The Company has engaged legal counsel in the matter and filed an answer to the complaint denying Buffalo’s allegations. Currently, the
Company's defense is being provided through its General Liability Insurance Policy carrier under a reservation of rights letter. While the parties
are currently in negotiations regarding a potential settlement of the claims, at this stage of the litigation the outcome cannot be predicted with any
degree of reasonable certainty. In the event the matter is not settled, the Company intends to continue to vigorously defend itself against Buffalo’s
claims.
We are not currently involved in legal proceedings, other than the complaint described above, that could reasonably be expected to have
a material adverse effect on our business, prospects, financial condition or results of operations other than as described above. We may become
involved in material legal proceedings in the future.
ITEM 4. Mine Safety Disclosures.
Not applicable.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
PART II
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Since February 13, 2013, our common stock has been traded on the NASDAQ Capital Market under the ticker symbol "VTNR" (previously
our common stock was quoted on the OTCQB market). The following table sets forth, for the periods indicated, the high and low sales prices for
our common stock, for the quarters presented. Prices represent inter-dealer quotations without adjustments for markups, markdowns, and
commissions, and may not represent actual transactions.
QUARTER ENDING
HIGH
LOW
FISCAL 2012
December 31, 2012
September 30, 2012
June 30, 2012
March 31, 2012
FISCAL 2011
December 31, 2011
September 30, 2011
June 30, 2011
March 31, 2011
$ 3.60
$ 2.52
$ 2.35
$ 2.49
$ 2.90
$ 3.90
$ 4.00
$ 0.88
$ 2.01
$ 1.25
$ 1.30
$ 1.80
$ 2.05
$ 2.56
$ 0.71
$ 0.36
HOLDERS
As of March 18, 2013, there were 17,176,001 shares of our common stock issued and outstanding held by approximately 664 holders of
record, not including holders who hold their shares in street name. As of March 18, 2013, there were 1,428,923 shares of our Series A Preferred
Stock issued and outstanding, which were held by approximately 141 holders of record.
DIVIDENDS
We have not paid any dividends on our common stock to date and do not anticipate that we will be paying dividends in the foreseeable
future. Any payment of cash dividends on our common stock in the future will be dependent upon the amount of funds legally available, our
earnings, if any, our financial condition, our anticipated capital requirements and other factors that our Board of Directors may think are relevant.
However, we currently intend for the foreseeable future to follow a policy of retaining all of our earnings, if any, to finance the development and
expansion of our business and, therefore, do not expect to pay any dividends on our common stock in the foreseeable future. Additionally, the
terms of our preferred stock impose restrictions on our ability to pay dividends.
Description of Capital Stock
Common Stock
The total number of authorized shares of our common stock is 750,000,000 shares, $0.001 par value per share.
Each share of our common stock is entitled to equal dividends and distributions per share with respect to the common stock when, as and
if declared by our Board of Directors. No holder of any shares of our common stock has a preemptive right to subscribe for any of our securities,
nor are any shares of our common stock subject to redemption or convertible into other securities. Upon liquidation, dissolution or winding-up of
the Company, and after payment to our creditors and preferred shareholders, if any, our assets will be divided pro rata on a share-for-share basis
among the holders of our common stock. Each share of our common stock is entitled to one vote on all shareholder matters.. Shares of our
common stock do not possess any cumulative voting rights.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Preferred Stock
The total number of “blank check” authorized shares of our preferred stock is 50,000,000 shares, $0.001 par value per share. The total
number of authorized shares of our Series A Convertible Preferred Stock (“Series A Preferred”) is 5,000,000 and the total number of authorized
shares of Vertex’s Series B Convertible Preferred Stock is 2,000,000 (“Series B Preferred”, provided that no shares of Series B Preferred are
currently outstanding).
Series A Preferred
Holders of outstanding shares of Series A Preferred are entitled to receive dividends, when, as, and if declared by our Board of Directors.
No dividends or similar distributions may be made on shares of capital stock or securities junior to our Series A Preferred until dividends in the
same amount per share on our Series A Preferred have been declared and paid. In connection with a liquidation, winding-up, dissolution or sale of
the Company, each share of our Series A Preferred is entitled to receive $1.49 prior to similar liquidation payments due on shares of our common
stock or any other class of securities junior to the Series A Preferred. Shares of Series A Preferred are not entitled to participate with the holders
of our common stock with respect to the distribution of any remaining assets of the Company.
Each share of Series A Preferred is entitled to that number of votes equal to the number of whole shares of common stock into which it is
convertible. Generally, holders of our common stock and Vertex Series A Preferred vote together as a single class.
Shares of Series A Preferred automatically convert into shares of our common stock on the earliest to occur of the following:
The affirmative vote or written consent of the holders of a majority of the then-outstanding shares of Series A Preferred;
If the closing market price of our common stock averages at least $15.00 per share over a period of 20 consecutive trading days and
the daily trading volume averages at least 7,500 shares over such period;
If we consummate an underwritten public offering of our securities at a price per share not less than $10.00 and for a total gross
offering amount of at least $10 million; or
If a sale of the Company occurs resulting in proceeds to the holders of Series A Preferred of a per share amount of at least $10.00.
·
·
·
·
Each share of Series A Preferred converts into one share of common stock, subject to adjustment.
Series B Preferred Stock
The Series B Preferred Stock have the following rights, preferences and limitations:
·
·
·
·
The Series B Preferred Stock includes a liquidation preference which is junior to the Company’s previously outstanding shares of
preferred stock, senior securities and other security holders as provided in further detail in the Designation;
The Series B Preferred Stock is convertible into shares of the Company’s common stock on a one for one basis at a conversion price of
$1.00 per share, provided that the Series B Preferred Stock automatically converts into shares of the Company’s common stock on a
one for one basis if the Company’s common stock trades above $2.00 per share for a period of 10 consecutive trading days;
The Series B Preferred Stock has no voting rights (other than on matters concerning the Series B Preferred Stock as further described
in the Designation); and
The Company was obligated to redeem any unconverted shares of Series B Preferred Stock in cash at $1.00 per share on the third
anniversary date of the original issuance date of each share of Vertex Series B Preferred Stock.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
From June 2nd to June 15th 2011 (ten (10) consecutive trading days), the trading price of the Company’s common stock on the Over-The-
Counter Bulletin Board closed at equal to or greater than $2.00 per share, which triggered the automatic conversion provision of the 600,000
outstanding shares of Series B Preferred Stock. As a result, effective June 15, 2011, all 600,000 previously outstanding shares of Series B
Preferred Stock automatically converted, without any required action by any holder thereof, into 600,000 shares of the Company’s common stock.
Options and Warrants
We assumed (i) warrants to purchase approximately 94,084 shares of our common stock, each at a nominal exercise price; (ii) warrants to
purchase an aggregate of 542,916 shares of common stock with exercise prices ranging from between $10.00 and $27.50 per share; and (iii)
options to purchase 659,300 shares of common stock with exercise prices ranging from between $1.55 to $37.00 per share in connection with the
Merger (of which options to purchase 155,995 shares had expired unexercised as of December 31, 2012 and options to purchase an additional
113,530 shares had been exercised). We also granted warrants to purchase an aggregate of 774,478 shares of our common stock to the partners
of Holdings, which warrants had various exercise prices ranging from $1.55 to $37.00 per share, and had various expiration dates from between
April 28, 2010 and February 26, 2018, and which warrants represented 40% of the total outstanding warrants and options of World Waste (not
taking into account the warrants with a nominal exercise price, as described above) on the effective date of the Merger (of which warrants to
purchase 457,778 shares had expired unexercised as of December 31, 2012).
We have also granted options to purchase an aggregate of 2,326,500 shares (of which options to purchase 85,000 shares have been
forfeited, options to purchase 105,000 shares have expired and options to purchase 50,000 shares have been exercised) with exercise prices
ranging between $0.45 and $3.03 per share, all of which are held by our employees, directors, and consultants as of December 31,
2012. Additionally, we have warrants to purchase 525,808 shares of our common stock outstanding, which were either assumed in connection
with or issued in connection with the Merger, which have exercise prices from between $10.00 and $27.50 per share and expiration dates from
between February 8, 2013 and January 1, 2014 and options to purchase 817,667 shares of our common stock outstanding, which were either
assumed in connection with or issued in connection with the Merger, which have exercise prices from between $11.10 and $37.00 per share and
expiration dates from between May 1, 2014 and May 21, 2017 as of December 31, 2012. Finally, we have warrants to purchase 637,000 shares of
our common stock outstanding at exercise prices from between $0.75 and $2.00 per share and expiration dates from between February 10,
2013 and May 10, 2015 as of December 31, 2012.
EQUITY COMPENSATION PLAN INFORMATION
The Company previously assumed World Waste’s 2004 Incentive Stock Option Plan (the “2004 Plan”), which was approved by
shareholders, and provided for the issuance of a total of up to 200,000 shares of common stock and options to acquire common stock to
employees, directors and consultants. A total of options to purchase 169,617 shares were previously granted under the 2004 Plan, which were
assumed in the Merger.
The Company also previously assumed World Waste’s 2007 Incentive Stock Plan (the “2007 Plan”), which was not shareholder-approved.
The 2007 Plan provided for the issuance of a total of up to 600,000 shares of common stock and options to acquire common stock to employees,
Directors and consultants. A total of options to purchase 429,212 shares were previously granted under the 2007 Plan, which were assumed in
the Merger.
Effective May 16, 2008, our Board of Directors approved our 2008 Stock Incentive Plan, which was subsequently approved by a majority
of our shareholders on December 3, 2008, which allows the Board of Directors to grant up to an aggregate of 600,000 qualified and non-qualified
stock options, restricted stock and performance based awards of securities to our officers, Directors and consultants to help attract and retain our
qualified personnel (the “2008 Plan”).
Effective July 15, 2009, our Board of Directors approved our 2009 Stock Incentive Plan, which was subsequently approved by a majority
of our shareholders on July 14, 2010, which allows the Board of Directors to grant up to an aggregate of 1,575,000 qualified and non-qualified
stock options, restricted stock and performance based awards of securities to our officers, Directors and consultants to help attract and retain
qualified personnel (the “2009 Plan” and collectively with the 2008 Plan, the “Plans”).
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The following table provides information as of December 31, 2012 regarding the 2004 Plan, the 2007 Plan and the Plans (including
individual compensation arrangements) under which equity securities are authorized for issuance:
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
Weighted-average exercise
price of outstanding
options, warrants and rights
Number of securities
available for future issuance
under equity compensation
plans (excluding those in
first column)
2,804,500
773,100
3,577,600
$2.95
$5.89
28,800
156,900
185,700
Plan Category
Equity compensation plans
approved by the security holders
Equity compensation plans
not approved by the security holders
Total
Recent Sales Of Unregistered Securities
During the twelve months ending December 31, 2012, 2,913,748 shares of the Company's Series A Preferred Stock were converted and
options and warrants to purchase 87,500 shares were exercised for cash proceeds of $112,625 and an aggregate of 3,001,248 shares of the
Company's common stock were issued in connection with such conversions and exercises. In addition, 15,000 shares of the Company’s common
stock were exercised for a net of 3,835 shares of common stock (when adjusting for a cashless exercise of such options and the payment, in
shares of common stock, of an aggregate exercise price of $23,250 in connection with such exercise) and 3,835 shares of common stock were
issued to the option holder in connection with such exercise; and 4,545,455 restricted shares were issued as consideration for the Acquisition,
described above.
Additionally, in August 2012, we granted options to purchase 150,000 shares of our common stock to John Strickland, the Manager of
Supply and Trade, in connection with our July 2012 entry into an employment agreement with Mr. Strickland. The options have a term of 10
years, an exercise price of $1.82 per share (the closing price of the Company’s common stock on the August 17, 2012 grant date), and vest at the
rate of 1/4th of such options on each of the three anniversaries of the grant date, with the first 37,500 option tranche vesting on such grant date, in
each case subject to the Company’s 2009 Plan.
In September 2012, we granted options to purchase an aggregate of 75,000 shares of our common stock to four employees of Holdings
assumed in the Acquisition. The options have a term of 10 years, an exercise price of $2.10 per share (the closing price of the Company’s
common stock on the September 19, 2012 grant date), and vest at the rate of 1/4th of such options on each of the four anniversaries of the grant
date, subject to the Company’s 2009 Plan.
Subsequent to December 31, 2012, a total of 83,968 shares of the Company’s Series A Preferred Stock were converted into 83,968
shares of the Company’s common stock and warrants to purchase 175,000 shares of the Company’s common stock were exercised for a net of
102,484 shares of common stock (when adjusting for a cashless exercise of such warrants and the payment, in shares of common stock, of an
aggregate exercise price of $256,250 in connection with such exercise) and 102,484 shares of common stock were issued to the warrant holders
in connection with such exercises; and options to purchase 35,000 shares of the Company’s common stock were exercised for a net of 24,085
shares of common stock (when adjusting for a cashless exercise of such options and the payment, in shares of common stock, of an aggregate
exercise price of $39,500 in connection with such exercise) and 24,085 shares of common stock were issued to the option holders in connection
with such exercise.
We claim an exemption from registration afforded by Section 3(a)(9) of the Securities Act of 1933, as amended (the “Act”), for the above
conversions and cashless exercises, as the securities were exchanged by the Company with its existing security holders exclusively in
transactions where no commission or other remuneration was paid or given directly or indirectly for soliciting such exchange and Section 4(2) of
the Act for the issuances, grants and shares issuable upon cash exercise of the warrants and options, since the issuances did not involve a public
offering, the recipients took the securities for investment and not resale and we took appropriate measures to restrict transfer.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Item 6. Selected Financial Data
Not applicable.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Strategy and Plan of Operations
The Principal elements of our strategy include:
·
·
·
·
·
·
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, including assets or technologies which complement TCEP. Currently, we are using TCEP to re-refine used
oil feedstock into cutterstock for use in the marine fuel market. We believe that the expansion of our TCEP 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.
Expand TCEP Re-Refinement Capacity. We intend to expand our TCEP capacity by building additional TCEP facilities to re-refine
feedstock. We believe the TCEP technology has a distinct competitive advantage over conventional re-refining technology because it
produces a high-quality fuel oil product, and the capital expenditures required to build a TCEP plant are significantly lower than a
comparable conventional re-refining facility. By continuing the transition from our historical role as a value-added logistics provider to
operating as a re-refiner, we believe we will be able to leverage our feedstock supply network and aggregation capabilities to upgrade a
larger percentage of our feedstock inventory into higher value end products which we believe should lead to increased revenue and
gross margins. We intend to build TCEP facilities near the geographic location of substantial feedstock sources that we have
relationships with through our existing operations or from an acquisition. By establishing TCEP facilities near proven feedstock
sources, we seek to lower our transportation costs and lower the risk of operating plants at low capacity.
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 for the implementation of TCEP. In addition, we intend to pursue further vertical integration opportunities by acquiring
complementary recycling and processing technologies where we can realize synergies by leveraging our customer and vendor
relationships, infrastructure, and personnel, and by eliminating duplicative overhead costs.
Alternative Energy Project Development. We will continue to evaluate and potentially pursue various alternative energy project
development opportunities. These opportunities may be a continuation of the projects sourced originally by World Waste
Technologies, Inc., a development stage municipal solid waste conversion company we merged with in April 2009, and/or may include
new projects initiated by us.
31
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
In connection with the above elements of our business strategy, and in order to further strengthen our foothold in the collection and re-
refining business, improve profitability and simplify related party transactions, the Company acquired substantially all of the assets and liabilities of
Holdings on September 11, 2012 pursuant to the Acquisition, as described above under “Business” – “Recent Acquisition”.
RESULTS OF OPERATIONS
Description of Material Financial Line Items:
Revenues
We generate revenues from two existing operating divisions as follows:
BLACK OIL - Revenues for our Black Oil division are comprised primarily of 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 through TCEP. The finished product is then sold by barge as a fuel oil cutterstock and a feedstock component for
major refineries.
REFINING AND MARKETING - The Refining and Marketing division generates revenues relating to the sales of finished products. The
Refining and Marketing division gathers hydrocarbon streams in the form of petroleum distillates, transmix and other chemical products that have
become off-specification during the transportation or refining process. These feedstock streams are purchased from pipeline operators, refineries,
chemical processing facilities and third-party providers, and then processed at a third-party facility under our direction. The end products are
typically three distillate petroleum streams (gasoline blendstock, pygas and fuel oil cutterstock), which are sold to major oil companies or to large
petroleum trading and blending companies. The end products are delivered by barge and truck to customers.
Our revenues are affected by changes in various commodity prices including crude oil, natural gas and #6 oil.
Cost of Revenues
BLACK OIL - Cost of revenues for our Black Oil division are comprised primarily of feedstock purchases from a network of providers.
Other cost of revenues include processing costs, transportation costs, purchasing and receiving costs, analytical assessments, brokerage fees
and commissions, and surveying and storage costs.
REFINING AND MARKETING - The Refining and Marketing division incurs cost of revenues relating to the purchase of feedstock,
purchasing and receiving costs, and inspection and processing of the feedstock into gasoline blendstock, pygas and fuel oil cutter by a third party.
Cost of revenues also includes broker’s fees, inspection and transportation costs.
Our cost of revenues are affected by changes in various commodity indices, including crude oil, natural gas and #6 oil. 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.
RESULTS OF OPERATIONS FOR THE FISCAL YEAR ENDED DECEMBER 31, 2012 COMPARED TO THE FISCAL YEAR ENDED
DECEMBER 31, 2011
Set forth below are our results of operations for the year ended December 31, 2012, as compared to the same period in 2011; in the
comparative tables below, increases in revenue/income or decreases in expense (favorable variances) are shown without parentheses while
decreases in revenue/income or increases in expense (unfavorable variances) are shown with parentheses in the “$ Change” and “% Change”
columns.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Revenues
Cost of Revenues
Gross Profit
Twelve Months Ended
December 31,
2012
2011
$ 134,573,243 $ 109,740,257 $ 24,832,986
$ Change % Change
23%
124,788,116 101,666,187
(23,121,929)
(23)%
9,785,127
8,074,070
1,711,057
21%
Selling, general and administrative expenses (exclusive of merger related
expenses)
6,137,301
4,099,682
(2,037,619)
(50)%
Merger related expenses
1,256,576
-
(1,256,576)
-
Total selling, general and administrative expenses
7,393,877
4,099,682
(3,294,195)
Income (loss) from operations
Other Income (expense)
Interest Income
Interest Expense
Total other income (expense)
2,391,250
3,974,388
(1,583,138)
1,740
(135,364)
(133,624)
-
(62,686)
(62,686)
1,740
(72,678)
(70,938)
Income (loss) before income tax
2,257,626
3,911,702
(1,654,076)
Income tax (expense) benefit
1,400,641
1,841,813
(441,172)
Net income (loss)
$
3,658,267
$
5,753,515 $ (2,095,248)
Each of our segment’s gross profit during these periods was as follows:
(80)%
(40)%
100%
(116)%
(113)%
(42)%
(24)%
(36)%
Twelve Months Ended
December 31,
Black Oil Segment
Total revenue
Total cost of revenue
Gross profit
Refining Segment
Total revenue
Total cost of revenue
Gross profit
2012
2011
$ 90,237,692 $ 72,349,181 $ 17,888,511
(17,011,226)
877,285
85,206,169 68,194,943
4,154,238 $
5,031,523 $
$
$ Change % Change
$ 44,335,551 $ 37,391,076 $
39,581,947 33,471,244
3,919,832 $
4,753,604 $
$
6,944,475
(6,110,703)
833,772
25%
(25)%
21%
19%
(18)%
21%
Our revenues and cost of revenues are significantly impacted by fluctuations in commodity prices; decreases in commodity prices typically
result in decreases in revenue and cost of revenues. 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.
Total revenues increased 23% for the year ended December 31, 2012, compared to the year ended December 31, 2011, due to increases
in commodity pricing and increased volume. The average posting (U.S. Gulfcoast Residual Fuel No. 6 3%) for 2012 increased $3.67 per barrel
from a 2011 average of $95.66 per barrel to an average of $99.33 per barrel during 2012. On average, prices we received for our products
increased 4% for the year ended December 31, 2012, compared to the year ended December 31, 2011. The increases in pricing and volume
described above resulted in a $25 million increase in revenue.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Volume for our Black Oil division increased 53% percent during fiscal 2012 compared to 2011, respectively. This volume increase is
attributable to the increased amount of product being processed through TCEP, as well as increased volume being delivered and sourced to third
party re-refiners and fuel blending companies. Our per barrel margin in the Black Oil division decreased approximately 3% for the twelve months
ended December 31, 2012 from the same period in 2011. The decrease in margins was due to the increase in volume of product being managed
along with increased pricing for feedstock and increased processing costs during 2012 for TCEP. As volumes and production increase in our
Black Oil division it often takes a few quarters to recognize increased additional per barrel margin, this is because of the fact that when we move
into a new geographic location it takes us a period of time before we are able to create and benefit from economies of scale.
Our Black Oil business, through the use of the TCEP, generated revenues of $57,698,912 for the year ended December 31, 2012, with
cost of revenues of $55,264,067, producing a gross profit of $2,434,845. During the year ended December 31, 2011, these revenues were
$52,097,274 with cost of revenues of $49,941,692, producing gross profit of $2,155,582. Due to the Company now owning the TCEP technology
at year-end and during the year having a license to the technology (which technology was acquired as part of the Acquisition, described above
under “Business” – “Recent Acquisition”), our income from operations has been positively affected for the twelve months ended December 31,
2012. Prior to September 1, 2012, we operated this technology from CMT pursuant to a perpetual license agreement. Gross profit increased for
the year ended December 31, 2012, compared to 2011, as a result of increased volumes processed through our TCEP operation as well as
improved market conditions for the twelve months ended December 31, 2012.
Total volume companywide increased 22% during fiscal 2012 compared to 2011, and our per barrel margin decreased approximately 1%
for fiscal 2012, compared to 2011.
Our Refining and Marketing division experienced an increase in production of 24% for its fuel oil cutter product for the year ended
December 31, 2012, compared to the same period in 2011, and commodity prices increased approximately 3% over the same period. The
average posting (U.S. Gulfcoast No. 2 Waterborne) during 2012 increased $3.44 per barrel from $122.73 per barrel for 2011 to $126.17 per barrel
for 2012.
Our pygas production increased 41% for the year ended December 31, 2012, compared to the same period in 2011 and commodity prices
increased approximately 4% for our finished product for 2012, compared to the same period in 2011.
Our gasoline blendstock volumes decreased 15% for the year ended December 31, 2012 as compared to 2011. The average posting
(U.S. Gulfcoast Unleaded 87 Waterborne) during 2012 increased $0.12 per gallon from $2.78 per gallon for 2011 to $2.90 per gallon during 2012.
The overall increase in revenues associated with our Refining and Marketing division was due to increases in volumes as well as market prices
for the period ended December 31, 2012.
Overall volume for the Refining and Marketing division increased 16% during the twelve months ended December 31, 2012, compared to
the twelve months ended December 31, 2011. Margins per barrel also increased in the Refining and Marketing division as a result of improved
operating costs and market conditions.
Prevailing prices of certain commodity products can significantly impact our revenues and cash flows., As noted above the revenue
variances from fiscal 2011 to 2012 were impacted slightly due to the changes in commodity pricing between the two periods as detailed below.
34
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The following table sets forth the high and low spot prices during 2011 for our key benchmarks.
2011
Benchmark
U.S. Gulfcoast No. 2 Waterborne (dollars per gallon)
U.S. Gulfcoast Unleaded 87 Waterborne (dollars per
gallon)
U.S. Gulfcoast Residual Fuel No. 6 3% (dollars per
barrel)
NYMEX Crude oil (Dollars per barrel)
Reported in Platt's US Marketscan (Gulf Coast)
High
Date
Low
Date
$
$
$
$
3.30
3.53
105.20
113.93
April 8 $
May 9 $
November 8 $
April 29 $
2.44
2.33
76.70
75.67
The following table sets forth the high and low spot prices during 2012 for our key benchmarks.
2012
Benchmark
U.S. Gulfcoast No. 2 Waterborne (dollars per gallon)
U.S. Gulfcoast Unleaded 87 Waterborne (dollars per
gallon)
U.S. Gulfcoast Residual Fuel No. 6 3% (dollars per
barrel)
NYMEX Crude oil (Dollars per barrel)
Reported in Platt's US Marketscan (Gulf Coast)
High
Date
Low
Date
$
$
$
$
3.27
3.43
114.35
109.77
Feb. 24 $
April 2 $
March 1 $
Feb. 24 $
2.54
2.36
82.60
77.69
We have seen on average a fairly stable market in each of the benchmark commodities we track during 2011 and 2012.
January 4
January 25
January 4
October 4
June 28
Dec. 10
June 21
June 28
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.
Gross profit increased 21% from $8,074,070 for the twelve months ended December 31, 2011 to $9,785,127 for the twelve months ended
December 31, 2012, primarily due to increases in volumes sold or re-refined, more stabilized and slight increases in commodity pricing.
We had selling, general and administrative expenses (exclusive of acquisition related expenses) of $6,137,301 for the twelve months
ended December 31, 2012, compared to $4,099,682 from the prior year’s period, an increase of $2,037,619 or 50% from the prior period, due to
an increase in overall administrative expenses generated by the new business lines and additional compensation expenses associated with
employees acquired as a result of the Acquisition. The Company incurred an additional $1,256,576 of one-time legal, accounting, auditing and
investment banking expenses during the twelve months ended December 31, 2012 related to the Acquisition of Holdings.
We had income before income taxes of $2,257,626 for the twelve months ended December 31, 2012 compared to income before income
taxes of $3,911,702 for the twelve months ended December 31, 2011, a decrease in net income before taxes of $1,654,076 or 42% from the prior
year’s period. The decrease in net income before taxes was largely due to increased administrative expenses related to the one-time Acquisition
related expenses of $1,256,576. We anticipate the Acquisition having a minimal impact on revenue; however we expect to see a reduction in our
cost of revenues and consequently an improvement in our gross profit margin as well as our net income as a result of the Acquisition. We had an
income tax benefit of $1,400,641 for the twelve months ended December 31, 2012, compared to an income tax benefit of 1,841,813 for the same
period ended December 31, 2011. The benefit for income taxes, for which for the Company has recorded a net deferred asset based on
reducing our valuation allowance related to our approximately $36 million of net operating losses that may be used to offset taxable income
generated by the Company in future periods.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
We had net income of $3,658,267 for the twelve months ended December 31, 2012 compared to net income of $5,753,515 for the twelve
months ended December 31, 2011, a decrease in net income of $2,095,248 or 36% from the prior year’s period.
Financial Highlights for the fourth quarter Include:
·
Revenue increased 3% to $32.2 million for the fourth quarter 2012, compared with $31.3 million in the fourth quarter of 2011;
· Gross profit increased 127% to $2.9 million compared with $1.3 million in the prior year’s quarter; and
·
Volumes increased 15% during the fourth quarter of 2012 compared to 2011, and our per barrel margin increased approximately 98% for
the fourth quarter of 2012, compared to the prior year’s fourth quarter.
Liquidity and Capital Resources
The success of our current business operations is not dependent on extensive capital expenditures, but rather on relationships with
feedstock suppliers and end-product customers, and on 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 $49,102,377 as of December 31, 2012 compared to $16,733,971 at December 31, 2011. This significant increase
was mainly due to the Acquisition of Holdings’ assets which included fixed assets of $11,617,368 consisting of five used oil collection branch
locations and associated storage facilities and rolling stock (collection and transport trucks), a 19 acre tank terminal storage facility located on the
Houston ship-channel, and a small trucking operation. In addition it included $15,934,724 of intangible assets which represented the value of the
purchase of the patents and technology related to the TCEP operation. The increase was also due to the $3,658,267 of net income which was
generated during the twelve month period ended December 31, 2012; a $132,752 increase in cash and cash equivalents as of December 31,
2012 compared to the year ended December 31, 2011, as well as a $1,724,774 increase in accounts receivable, net, as of December 31, 2012,
compared to December 31, 2011. The increase in assets was offset by the $1,804,389 of Acquisition related adjustments associated with the
purchase price allocation of the Holdings’ Acquisition. Total current assets as of December 31, 2012 of $14,331,308 consisted of cash and cash
equivalents of $807,940, accounts receivable, net of $7,160,780, inventory of $5,870,121, and prepaid expenses of $492,467. Long term assets
consisted of fixed assets, net of $11,617,368, an intangible asset in the amount of $15,934,724, which represents the value of the Company’s
TCEP patent, and $3,515,977 of goodwill (booked in connection with the Acquisition of Holdings).
As of December 31, 2012, as a result of the Acquisition, the Company owns outright and no longer licenses the TCEP technology. In
addition, mainly as a result of the approximately $36 million of net operating losses that may be used to offset taxable income generated by the
Company in future periods, the Company has recorded a deferred federal income tax asset of $3,703,000 as of December 31, 2012 and
$2,006,000 as of December 31, 2011. Our cash, accounts receivable, inventory and accounts payable fluctuate and are somewhat tied to one
another based on the timing of our inventory cycles and sales.
We had total current liabilities of $10,618,563 as of December 31, 2012, compared to $7,320,474 at December 31, 2011. This increase
was largely due to the increase in our accounts payable during the twelve months ended December 31, 2012 of $2,405,041, in addition and in
connection with the Acquisition, the Company obtained a term loan with Bank of America of which the current portion outstanding at December
31, 2012 was $1,700,000.
We had total liabilities of $28,702,020 as of December 31, 2012, including current liabilities of $10,618,563 and long-term liabilities of
$18,083,457, which included $6,281,457 of long-term debt representing amounts due on the Term Note, line of credit of $6,750,000, representing
amounts borrowed under the Revolving Note, $4,711,000 of contingent consideration relating to the Earn-Out Payments associated with the
Acquisition, and $341,000 of deferred federal income tax.
We had working capital of $3,712,745 as of December 31, 2012, compared to working capital of $5,353,780 as of December 31,
2011. The reduction in working capital from December 31, 2011 to December 31, 2012 is mainly due to liabilities assumed as a result of and
incurred in connection with the Acquisition.
36
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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 future capital expenditures related to new
TCEP facilities.
In September 2010, we entered into a loan agreement with Bank of America Merrill Lynch. Pursuant to the loan agreement, Bank of
America Merrill Lynch agreed to loan up to $3,500,000 in the form of a revolving line of credit. The line of credit accrued interest at the bank’s
LIBOR rate plus 3%, adjusted daily, and was originally due on September 16, 2011 (provided that the parties subsequently entered into various
extensions of the line of credit, extending the due date to March 31, 2014). The loan agreement was terminated pursuant to our entry into the
Credit Agreement described below. We had not borrowed any funds under the loan agreement at the time it was terminated, and as such
$3,500,000 was available under such loan agreement.
On September 11, 2012, we entered into a Credit Agreement with the Lender effective as of August 31, 2012, pursuant to which we
borrowed $8,500,000 in the form of a term loan, which is evidenced by a Term Note, and the Lender agreed to provide us with an additional
$10,000,000 revolving credit facility (the “Credit Facility”), which is evidenced by a Revolving Note.
Pursuant to the Credit Agreement, we can request loans from time to time under the Credit Facility, subject to the terms and conditions of
the Credit Agreement, provided that the total amount loaned pursuant to the Credit Facility cannot exceed the lesser of (a) $10,000,000 and (b) an
amount equal to the total of (i) 80% of our accounts in which Lender has a first-priority perfected security interest; (ii) 80% of our finished-goods
inventory in which Lender holds a first-priority perfected security interest, in each case subject to the terms and conditions of the Credit
Agreement, plus (iii) $1,500,000 through December 31, 2012, and $0 thereafter.
Amounts borrowed under the Revolving Note bear interest at our option at the lesser of the Lender’s prime commercial lending rate then
in effect or the LIBOR rate in effect plus 2.75%. Accrued and unpaid interest on the Revolving Note is due and payable monthly in arrears and all
amounts outstanding under the Revolving Note are due and payable on August 31, 2014.
Amounts borrowed under the Term Note bear interest at our option at the lesser of the Lender’s prime commercial lending rate then in
effect or the LIBOR rate in effect plus 2.75%. Accrued and unpaid interest on the Term Note is due and payable monthly in arrears and all
amounts outstanding under the Term Note are due and payable on August 31, 2015. Additionally, payments of principal in the amount of
$141,667 are due and payable on the Term Note, monthly in arrears on the last day of each month beginning September 30, 2012, and continuing
thereafter until the maturity date.
We agreed to comply with certain standard affirmative and negative covenants in connection with the Credit Agreement and agreed to
meet the following financial covenants at such time as any loans or other obligations are outstanding under the Credit Agreement, commencing
with the quarter ending September 30, 2012: (i) the ratio of (a) our EBITDA minus cash taxes, minus distributions, minus unfinanced capital
expenditures, in each case for the immediately preceding four fiscal-quarter period, to (b) the sum of our interest expense for the immediately
preceding four fiscal-quarter period, plus our current maturities of long-term debt, in each case, as of the last day of such four fiscal-quarter
period, all as determined in accordance with GAAP, may not at any time be less than 1.25 to 1.00 (calculated and tested quarterly); (ii) the ratio of
total debt funded under the Credit Agreement to our EBITDA cannot be greater than 2.00 to 1.00 (calculated and tested quarterly); and (iii) the
sum of our tangible net worth cannot be less than $10,000,000 as of the last day of each fiscal quarter. While we were not in compliance with the
tangible net worth requirement of the Credit Agreement as of September 30, 2012 and December 31, 2012; the tangible net worth requirement
was included in the Credit Agreement in error and we and the Lender entered into a waiver and amendment agreement in January 2013, pursuant
to which the Lender agreed to waive such prior non-compliance with the tangible net worth requirement and to amend the Credit Agreement to
remove such net tangible worth requirement moving forward.
The Credit Agreement includes customary events of default for facilities of similar nature and size as the Credit Agreement and also
provides that an event of default occurs if (i) Benjamin P. Cowart, our Chief Executive Officer, President Chairman of the Board and largest
shareholder, ceases to be actively involved in our day-to-day management or operation or if Mr. Cowart ceases to own and control at least 25% of
our equity interests; (ii) we cease at any time to own and control 100% of the Transferred Partnerships acquired pursuant to the closing of the
Acquisition; Vertex II GP, LLC (“Vertex GP”), a wholly-owned subsidiary of the Company, formed for the purpose of the transaction, ceases to be
the sole general partner of the Transferred Partnerships; (iii) an agreement, letter of intent, or agreement in principle is executed with respect to
any proposed transaction or event or series of transactions or events which, individually or in the aggregate, could reasonably be expected to
result in either (i) or (ii), above; or (iv) a default occurs under the lease agreement for certain premises leased by CMT.
37
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
We agreed to pay the Lender the following fees in connection with the Credit Agreement: (i) a fee equal to 0.25% of the actual daily
amount by which (a) the committed amount of the Credit Facility exceeds (b) the amount outstanding under the Credit Facility plus the amount of
any lines of credit issued by Lender to us, so long as the average daily amount drawn on the Credit Facility is less than $5,000,000, for the
calendar quarter then-ended, payable quarterly in arrears beginning September 30, 2012; (ii) a closing fee in connection with the closing of the
Credit Facility; and (iii) certain fees associated with lines of credit issued by Lender as described in greater detail in the Credit Agreement.
Our obligations under the Credit Agreement and Notes are secured by a first priority security interest in substantially all of our assets,
including those assets and properties acquired in connection with the closing of the Acquisition, which was granted pursuant to our, and certain of
our subsidiaries, entry into security agreements with the Lender. Additionally, the Transferred Partnerships, Vertex GP and Acquisition guaranteed
our obligations under the Credit Agreement and Notes pursuant to guarantees entered into in favor of the Lender.
On September 11, 2012, we borrowed a total of $8.5 million under the Term Note and $8.75 million under the Revolving Note, the majority
of which funds have been used to pay Holdings the cash portion of the Purchase Price due in connection with the closing of the Acquisition, as
described in greater detail below under “Business” – “Recent Acquisition,” and to pay fees and costs associated with the closing of the Acquisition.
As of December 31, 2012, the Revolving Note had a balance of $6,750,000 and the Term Note had a balance of $7,933,333.
Management believes that the financing arrangement, in addition to projected earnings, will provide sufficient liquidity to fund our
operations for the foreseeable future, although we may seek additional financing to fund acquisitions or other development in the future.
Our re-refining business will require significant capital to design and construct any new facilities other than the existing facility in Baytown,
Texas. We currently estimate that the cost to construct a new, fully functional full-scale commercial process at another location would be
approximately $2.5 to $5.0 million, based on throughput capacity. The facility infrastructure would be an additional capitalized expenditure to
these proposed process costs and would depend on the location and site specifics of the facility.
We believe that cash from ongoing operations and our working capital facility will be sufficient to satisfy our existing cash
requirements. However, in order to implement our growth strategy, and pay our outstanding debts (as described above) we may need to secure
additional financing in the future.
Additionally, as part of our ongoing efforts to maintain a capital structure that is closely aligned with what we believe to be the potential of
our business and goals for future growth, which is subject to cyclical changes in commodity prices, we will be exploring additional sources of
external liquidity. The receptiveness of the capital markets to an offering of debt or equities cannot be assured and may be negatively impacted
by, among other things, debt maturities, current market conditions, and potential stockholder dilution. The sale of additional securities, if
undertaken by us and if accomplished, may result in dilution to our shareholders. We cannot assure you, however, that future financing will be
available in amounts or on terms acceptable to us, or at all.
There is currently only a limited market for our common stock, and as such, we anticipate that such market will be illiquid, sporadic and
subject to wide fluctuations in response to several factors moving forward, including, but not limited to:
(1) actual or anticipated variations in our results of operations;
(2) our ability or inability to generate new revenues; and
(3)
the number of shares in our public float.
38
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Furthermore, because our common stock is traded on the NASDAQ Capital Market, our stock price may be impacted by factors that are
unrelated or disproportionate to our operating performance. These market fluctuations, as well as general economic, political and market
conditions, such as recessions, interest rates or international currency fluctuations may adversely affect the market price of our common stock.
Additionally, at present, we have a limited number of shares in our public float, and as a result, there could be extreme fluctuations in the price of
our common stock.
We believe that our stock prices (bid, ask and closing prices) may not relate to the actual value our company, and may not reflect the
actual value of our common stock. Shareholders and potential investors in our common stock should exercise caution before making an
investment in our common stock, and should not rely on the publicly quoted or traded stock prices in determining our common stock value, but
should instead determine the value of our common stock based on the information contained in our public reports, industry information, and those
business valuation methods commonly used to value private companies.
Cash flows for the fiscal year ended December 31, 2012 compared to the fiscal year ended December 31, 2011 were:
Twelve Months Ended
December 31,
2012
2011
Beginning cash and cash equivalents
$
675,188 $
744,313
Net cash provided by (used in):
Operating activities
Investing activities
Financing activities
Net increase in cash and cash
equivalents
3,000,114
(3,148,025)
280,663
(70,866)
(304,509)
306,250
132,752
(69,125)
Ending cash and cash equivalents
$
807,940 $
675,188
Operating activities provided cash of $3,000,114 for the twelve months ended December 31, 2012 as compared to using $70,866 of cash
during the corresponding period in 2011. Our primary sources of liquidity are cash flows from our operations and the availability to borrow funds
under the Term Note. The primary reasons for the increase in cash provided by operating activities are related to the net income of $3,658,267
generated during the year ended December 31, 2012 and the increase in accounts payable of $2,405,041, offset by $3,703,000 of deferred
federal income tax asset, and a decrease of $235,557 in deposits. Additionally, non-cash items increasing net income included stock
compensation, which provided $178,968 of liquidity and depreciation and amortization which contributed $711,555 of net cash.
Investing activities used cash of $3,148,025 for the twelve months ended December 31, 2012 as compared to having used $304,509
during the corresponding period in 2011. Investing activities in 2012 were comprised of $209,061 in cash payments related to the license of the
TCEP (which was acquired as part of the Acquisition), $1,804,389 of net cash used in the Acquisition, and $1,134,575 used for the purchase of
fixed assets.
Financing activities provided $280,663 of cash during the twelve months ended December 31, 2012, as compared to $306,250 during the
corresponding period in 2011. Financing activities in 2012 included $112,625 of proceeds from the exercise of common stock warrants and
$750,000 of proceeds from amounts borrowed under the Line of Credit, offset by payments towards the Term Note of $581,962.
39
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Net Operating Losses
We intend to take advantage of any potential tax benefits related to net operating losses (“NOLs”) acquired as part of the World Waste
merger. As a result of the merger we acquired approximately $42 million of net operating losses that may be used to offset taxable income
generated by the Company in future periods.
It is possible that the Company may be unable to use these NOLs in their entirety. The extent to which the Company will be able to utilize
these carry-forwards in future periods is subject to limitations based on a number of factors, including the number of shares issued within a three-
year look-back period, whether the merger is deemed to be a change in control, whether there is deemed to be a continuity of World Waste’s
historical business, and the extent of the Company’s subsequent income. As of December 31, 2011, the Company had utilized approximately $4.4
million of these NOLs leaving approximately $35.4 million of potential NOLs of which we expect to utilize approximately $1.5 million for the twelve
months ended December 31, 2012, leaving approximately $33.9 million of potential NOLs.
Critical Accounting Policies and Use of Estimates
Our financial statements are prepared in accordance with GAAP. The preparation of these financial statements requires management to
make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Management regularly evaluates its
estimates and judgments, including those related to revenue recognition, goodwill, intangible assets, long-lived assets valuation, and legal
matters. Actual results may differ from these estimates. (See Note 2 to the Vertex Energy, Inc. financial statements included herein).
We evaluate the carrying value and recoverability of our long-lived assets within the provisions of the FASB ASC regarding long-lived
assets. It requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable through the estimated undiscounted cash flows expected to result from the use and eventual
disposition of the assets. Whenever any such impairment exists, an impairment loss will be recognized for the amount by which the carrying
value exceeds the fair value.
Revenue Recognition. Revenue for each of our divisions is recognized when persuasive evidence of an arrangement exists, goods are
delivered, sales price is determinable, and collection is reasonably assured. Revenue is recognized upon delivery by truck and railcar of feedstock
to our re-refining customers and upon product leaving our terminal facilities via barge.
Legal Matters. Accruals are established for legal matters when, in our opinion, it is probable that a liability exists and the liability can be
reasonably estimated. Actual expenses incurred in future periods can differ materially from accruals established.
Stock Based Compensation
We account for share-based expense and activity in accordance with FASB ASC Topic 718, which establishes accounting for equity
instruments exchanged for services. Under this provision share-based compensation costs are measured at the grant date, based on the
calculated fair value of the award, and are recognized as an expense over the employee’s requisite service period, generally the vesting period of
the equity grant.
Share-based payments to non-employees are measured at the grant date, based on the calculated fair value of the award, and are
recognized as an expense over the service period, generally the vesting period of the equity grant. We estimate the fair value of stock options
using the Black-Scholes valuation model. Key input assumptions used to estimate the fair value of stock options include the exercise price of the
award, expected option term, expected volatility of the stock over the option’s expected term, risk-free interest rate over the option’s expected
term, and the expected annual dividend yield. We believe that the valuation technique and approach utilized to develop the underlying
assumptions are appropriate in calculating the fair values of the stock options granted.
Basic and Diluted Loss per Share
Basic and diluted loss per share has been calculated based on the weighted average number of shares of common stock outstanding
during the period.
40
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
License Agreement Development Costs
We capitalize costs to improve any acquired intangible asset which is specifically identifiable, and has a definite life. All other costs are
expensed as incurred.
Income Taxes
We account for income taxes in accordance with the FASB ASC Topic 740. We record a valuation allowance against net deferred tax
assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future taxable income and when temporary differences become
deductible. We consider, among other available information, uncertainties surrounding the recoverability of deferred tax assets, scheduled
reversals of deferred tax liabilities, projected future taxable income, and other matters in making this assessment.
Recently Issued Accounting Pronouncements
In May 2011, the provisions of ASC Topic 820, “Fair Value Measurement,” were amended to clarify the application of existing fair value
measurements and to change certain fair value measurement and disclosure requirements. Amendments that change measurement and
disclosure requirements relate to (i) fair value measurement of financial instruments that are managed within a portfolio, (ii) application of
premiums and discounts in a fair value measurement, and (iii) additional disclosures about fair value measurements categorized with Level 3 of
the fair value hierarchy. These provisions are effective for the first interim or annual period beginning after December 31, 2011. The adoption of
this guidance effective January 1, 2012 did not affect our financial position or results of operations, but may result in additional disclosure.
In December 2011, the provisions of ASC Topic 210, “Balance Sheet,” were amended to require an entity to disclose information about
offsetting and related arrangements to enable users of its financial statements to understand the effect of these arrangements on its financial
position. The guidance requires entities to disclose both gross information and net information about both instruments and transactions eligible for
offset in the balance sheet and instruments and transactions subject to an agreement similar to a master netting arrangement. These provisions
are effective for interim and annual reporting periods beginning on January 1, 2013. The adoption of this guidance effective January 1, 2013 will
not affect our financial position or results of operations, but may result in additional disclosures.
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. We believe that the current downward trend in natural gas prices coupled with increasing
crude oil prices provides an attractive margin opportunity for our TCEP.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Pursuant to Item 305(e) of Regulation S-K (§ 229.305(e)), the Company is not required to provide the information required by this Item as
it is a “smaller reporting company,” as defined by Rule 229.10(f)(1).
41
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Item 8. Financial Statements and Supplementary Data
VERTEX ENERGY, INC.
CONTENTS TO FINANCIAL STATEMENTS
Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Page
F-2
F-3
F-4
F-5
F-6
F-7
F-1
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
LBB & ASSOCIATES LTD., LLP
10260 Westheimer Road, Suite 310
Houston, TX 77042
Phone: (713) 800-4343 Fax: (713) 456-2408
Report of Independent Registered Public Accounting Firm
To the Board of Directors of
Vertex Energy, Inc.
Houston, TX
We have audited the accompanying consolidated balance sheets of Vertex Energy, Inc. (the “Company”) as of December 31, 2012 and 2011, and
the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years then ended. These financial
statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our
audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Vertex
Energy, Inc. as of December 31, 2012 and 2011, and the results of its operations and its cash flows for each of the years then ended in conformity
with accounting principles generally accepted in the United States of America.
/s/ LBB & Associates Ltd., LLP
LBB & Associates Ltd., LLP
Houston, Texas
March 20, 2013
F-2
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
VERTEX ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
Current assets
Cash and cash equivalents
Accounts receivable, net
Accounts receivable- related party
Inventory
Prepaid expenses
Total current assets
Noncurrent assets
Licensing agreement, net
Fixed assets, net
Intangible assets, net
Goodwill
Deferred tax assets
Total noncurrent assets
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable and accrued expenses
Accounts payable-related party
Deposits
Current portion of long-term debt
Total current liabilities
Long-term liabilities
Long-term debt
Contingent consideration
Line of credit
Deferred tax liabilities
Total liabilities
Commitments and contingencies
STOCKHOLDERS’ EQUITY
Preferred stock, $0.001 par value per share:
50,000,000 shares authorized
Series A Convertible Preferred stock, $0.001 par value,
5,000,000 authorized and 1,512,891 and 4,426,639 issued
and outstanding at December 31, 2012 and December 31,
2011, respectively
Common stock, $0.001 par value per share;
750,000,000 shares authorized; 16,965,464 and 9,414,926
issued and outstanding at December 31, 2012 and
December 31, 2011, respectively
Additional paid-in capital
Retained earnings
Total stockholders’ equity
December 31,
2012
December
31,
2011
$
807,940
7,160,780
-
5,870,121
492,467
14,331,308
$
675,188
5,436,006
2,459
6,408,780
151,821
12,674,254
-
11,617,368
15,934,724
3,515,977
3,703,000
34,771,069
1,929,549
124,168
-
-
2,006,000
4,059,717
$ 49,102,377
$ 16,733,971
$
$
8,869,234
-
-
1,749,329
10,618,563
6,464,193
620,724
235,557
-
7,320,474
6,281,457
4,711,000
6,750,000
341,000
28,702,020
-
-
-
76,000
7,396,474
1,513
4,427
16,965
10,719,345
9,662,534
20,400,357
9,415
3,319,388
6,004,267
9,337,497
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$ 49,102,377
$ 16,733,971
See accompanying notes to the consolidated financial statements
F-3
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
VERTEX ENERGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
DECEMBER 31, 2012 AND 2011
Revenues
Revenues-related parties
Cost of revenues
Gross profit
Selling, general and administrative expenses
Acquisition related expenses
Total selling, general and administrative expenses
Income from operations
Other income (expense)
Other income
Interest expense
Total other income (expense)
Income before income taxes
Income tax benefit
Net income
Earnings per common share
Basic
Diluted
Shares used in computing earnings per share
Basic
Diluted
See accompanying notes to the consolidated financial statements
F-4
2012
2011
$ 134,573,243
-
134,573,243
$ 109,722,279
17,978
109,740,257
124,788,116
101,666,187
9,785,127
8,074,070
6,137,301
1,256,576
4,099,682
-
7,393,877
4,099,682
2,391,250
3,974,388
1,740
(135,364)
(133,624)
-
(62,686)
(62,686)
2,257,626
3,911,702
1,400,641
1,841,813
$
3,658,267
$
5,753,515
$
$
0.30
0.25
$
$
0.65
0.39
12,138,229
8,884,681
14,866,134
14,775,339
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
VERTEX ENERGY, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDING DECEMBER 31, 2012 AND 2011
Balance on December 31, 2010
Common Common Preferred Preferred Additional
Stock
Shares
4,675,716 $
Stock
Shares
8,370,849 $
Stock
$.001 Par
Stock
$.001 Par
Paid-in
Capital
4,676 $ 2,275,074 $
8,371
Retained Stockholders'
Earnings
Equity
2,538,873
250,752 $
Total
Exercise of stock options and
warrants
Issuance of stock options and
warrants
Conversion of preferred B stock
to common
Conversion of preferred A stock
to common
195,000
195
-
-
306,055
-
306,250
-
-
-
-
138,859
-
138,859
600,000
600
-
-
599,400
-
600,000
249,077
249
(249,077)
(249)
-
-
-
Net income
-
-
-
-
-
5,753,515
5,753,515
Balance on December 31, 2011
9,414,926
9,415
4,426,639
4,427
3,319,388
6,004,267
9,337,497
Exercise of stock options and
warrants
Issuance of stock options and
warrants
Issuance of restricted common
stock
Conversion of preferred A stock
to common
91,335
91
-
-
112,534
-
112,625
-
-
-
-
178,968
-
178,968
4,545,455
4,545
-
-
7,108,455
-
7,113,000
2,913,748
2,914
(2,913,748)
(2,914)
-
-
-
Net income
-
-
-
-
-
3,658,267
3,658,267
Balance on December 31, 2012 16,965,464 $
16,965
1,512,891 $
1,513 $ 10,719,345 $ 9,662,534 $
20,400,357
See accompanying notes to the consolidated financial statements
F-5
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
VERTEX ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2012 AND 2011
Cash flows operating activities
Net income
Adjustments to reconcile net income to cash
provided by (used in) operating activities
Stock based compensation expense
Depreciation and amortization
Deferred federal income tax
Changes in assets and liabilities
Accounts receivable
Accounts receivable- related parties
Inventory
Prepaid expenses and other current assets
Accounts payable and accrued expenses
Accounts payable-related parties
Other deposits
Net cash provided by (used in) operating activities
Cash flows from investing activities
Purchase of intangible assets
Acquisition, net
Purchase of fixed assets
Net cash used in investing activities
Cash flows from financing activities
Line of credit proceeds, net
Proceeds from exercise of common stock warrants
Borrowing from (payments to) note payable
Net cash provided by financing activities
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of the period
2012
2011
$
3,658,267
$
5,753,515
178,968
711,555
(1,432,000)
128,184
2,459
551,438
(247,337)
304,861
(620,724)
(235,557)
3,000,114
(209,061)
(1,804,389)
(1,134,575)
(3,148,025)
750,000
112,625
(581,962)
280,663
138,859
161,048
(1,930,000)
(3,953,496)
(2,459)
(2,506,999)
(51,336)
1,870,994
213,451
235,557
(70,866)
(241,454)
-
(63,055)
(304,509)
-
306,250
-
306,250
132,752
(69,125)
675,188
744,313
Cash and cash equivalents at end of period
$
807,940
$
675,188
SUPPLEMENTAL INFORMATION
Cash paid for interest during the period
Cash paid for income taxes during the period
NON-CASH TRANSACTIONS
Conversion of Series A Preferred Stock into common stock
Conversion of Series B Preferred Stock into common stock
$
$
$
$
128,838
23,359
2,914
-
$
$
$
$
80,756
107,000
249
600,000
See accompanying notes to the consolidated financial statements
F-6
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
VERTEX ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012
NOTE 1. BASIS OF PRESENTATION AND NATURE OF OPERATIONS
Vertex Energy, Inc. (“Vertex Energy” or the “Company”), provides a range of services designed to aggregate, process and recycle industrial and
commercial waste systems. Vertex Energy currently provides these services in 13 states, primarily in the Gulf Coast and Central Midwest Region
of the United States. Effective as of August 31, 2012, the Company acquired 100% of the outstanding equity interests of Vertex Acquisition Sub,
LLC ("Acquisition Sub"), a special purpose entity consisting of substantially all of the assets of Vertex Holdings, L.P. (“Holdings”) and real-estate
properties of B & S Cowart Family L.P.("B&S LP" and the "Acquisition"). Prior to closing the Acquisition, Holdings contributed to Acquisition Sub
substantially all of its assets and liabilities relating to the business of transporting, storing, processing and re-refining petroleum products, crudes
and used lubricants, including all of the outstanding equity interests in Holdings' wholly-owned operating subsidiaries, Cedar Marine Terminals,
L.P. ("CMT"); Crossroad Carriers, L.P. ("Crossroad"); Vertex Recovery, L.P. ("Vertex Recovery"); and H&H Oil, L.P. ("H&H Oil"), and B&S LP
contributed real estate associated with the operations of H&H Oil. See Note 15 for additional details on the Acquisition.
COMPANY OPERATIONS
Vertex Energy’s operations are primarily focused on recycling industrial waste streams and off-specification commercial chemical products. The
waste streams are purchased from an established network of local and regional collectors and generators. The Company manages the transport,
storage and delivery of the aggregated feedstock and product streams to end users. Vertex Energy’s two principal divisions are comprised of
Black Oil and Refining and Marketing.
Black Oil
Through its Black Oil division, which has been operational since 2001, Vertex Energy aggregates and sells used motor oil. The Company has a
network of approximately 50 suppliers that collect used oil from businesses such as oil change service stations, automotive repair shops,
manufacturing facilities, petroleum refineries, and petrochemical manufacturing operations. The Company purchases the used oil from collectors
and manages the logistics of transport, storage and delivery to our customers. Typically, the used oil is sold in bulk to ensure the efficient delivery
by truck, rail, or barge. In many cases, there are contractual purchase and sale agreements with the suppliers and customers,
respectively. These contracts are beneficial to all parties involved because they ensure a minimum volume is purchased from collectors, a
minimum volume is sold to the customers, and the Company is insulated from inventory risk by a spread between the costs to acquire used oil and
the revenues received from the sale and delivery of used oil. In addition, the Company operates its own re-refining operations at the CMT which
uses the proprietary Thermal Chemical Extraction Process (“TCEP”) technology to re-refine the used oil into marine fuel cutterstock and a higher-
value feedstock for further processing.
Refining and Marketing
Through its Refining and Marketing division, which has been operational since 2004, Vertex Energy aggregates used motor oil, petroleum
distillates, transmix and other off-specification chemical products. These feedstock streams are purchased from pipeline operators, refineries,
chemical processing facilities and third-party providers. The Company has a toll-based processing arrangement in place with KMTEX, Ltd.
(“KMTEX”) to re-refine these feedstock streams, under the Company’s direction, into various end products. KMTEX uses industry standard
processing technologies to re-refine the feedstock into pygas, gasoline blendstock and marine fuel cutterstock. The Company sells the re-refined
products directly to end customers or to processing facilities for further refinement.
F-7
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
VERTEX ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reclassifications
Certain amounts previously reported in our annual report on Form 10-K for the year ended December 31, 2011 have been reclassified to conform
to the 2012 presentation. These reclassifications have no impact on net income.
Principles of consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and
transactions have been eliminated in consolidation. The subsidiaries are as follows:
·
·
·
·
CMT operates a 19-acre bulk liquid storage facility on the Houston Ship Channel. The terminal serves as a truck-in, barge-out facility and
provides throughput terminal operations. CMT is also the site of the TCEP.
Crossroad is a third-party common carrier that provides transportation and logistical services for liquid petroleum products, as well as
other hazardous materials and product streams.
Vertex Recovery is a generator solutions company for the recycling and collections of used oil and oil-related residual materials from large
regional and national customers throughout the U.S. It facilitates its services through a network of independent recyclers and franchise
collectors.
H&H Oil collects and recycles used oil and residual materials from customers based in Austin, Baytown, San Antonio and Corpus Christi,
Texas.
Cash and cash equivalents
For purposes of the statement of cash flows, the Company considers all short-term investments purchased with original maturities of three months
or less at the date of purchase to be cash equivalents.
Accounts receivable
Accounts receivable represents amounts due from customers. Accounts receivable are recorded at invoiced amounts, net of reserves and
allowances, and do not bear interest. 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 30 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 Company
does not have any significant off balance sheet credit exposure related to its customers. The allowance was $0 at December 31, 2012 and 2011.
Inventory
Inventories of products consist of feedstocks and refined petroleum products and are reported at the lower of cost or market. Cost is determined
using the first-in, first-out (“FIFO”) method.
F-8
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
VERTEX ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012
Fixed assets
Fixed assets are stated at historical costs. Depreciation of fixed assets placed in operations is provided using the straight-line method over the
estimated useful lives of the assets. The policy of the Company is to charge amounts for maintenance and repairs to expenses, and to capitalize
expenditures for major replacements and betterments.
Intangible assets
Intangible assets are amortized over their estimated useful lives. Amortizable intangible assets are reviewed at least annually to determine
whether events and circumstances warrant a revision to the remaining period of amortization.
License agreement development costs
Until the Acquisition, the Company operated under an operating and licensing agreement with CMT. The Company capitalized costs to improve
any acquired intangible asset which were specifically identifiable, and had a definite life. All other costs were expensed as incurred. The
unamortized basis of the licensing agreement, approximately $2,043,000, was reclassified to intangible assets on the date of the Acquisition.
Goodwill
Goodwill represents the excess of the cost of businesses acquired over the fair value of their net assets at the dates of acquisition. Goodwill is
reviewed at least annually to assess the carrying value of goodwill associated with each of its distinct business units that comprise its business
segments of the Company to determine if impairment in value has occurred.
Revenue recognition
Revenue for each of the Company’s divisions is recognized when persuasive evidence of an arrangement exists, goods are delivered, sales price
is determinable, and collection is reasonably assured. Revenue is recognized upon delivery by truck and railcar of feedstock to its re-refining
customers and upon product leaving the Company’s terminal facilities via barge.
Leases
The Company recognizes lease expense on a straight-line basis over the minimum lease terms which expire at various dates through
2017. These leases are for office and storage tank facilities and are classified as operating leases. For leases that contain predetermined, fixed
escalations of the minimum rentals, the Company recognizes the rent expense on a straight-line basis and records the difference between the
rent expense and the rental amount payable in liabilities.
Leasehold improvements made at the inception of the lease are amortized over the shorter of the asset life or the initial lease term as described
above. Leasehold improvements made during the lease term are also amortized over the shorter of the asset life or the remaining lease term.
Fair value of financial instruments
Under the Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”), we are permitted to elect to measure financial
instruments and certain other items at fair value, with the change in fair value recorded in earnings. We elected not to measure any eligible items
using the fair value option. Consistent with the Fair Value Measurement Topic of the FASB ASC, we implemented guidelines relating to the
disclosure of our methodology for periodic measurement of our assets and liabilities recorded at fair market value.
F-9
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
VERTEX ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. A three-tier fair value hierarchy prioritizes the inputs used in measuring fair value. The hierarchy gives the
highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to
unobservable inputs (level 3 measurements). These tiers include:
·
·
·
Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets;
Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices
for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and
Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own
assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are
unobservable.
Our Level 1 assets primarily include our cash and cash equivalents. Valuations are obtained from readily available pricing sources for market
transactions involving identical assets or liabilities. The carrying amounts of accounts receivable, accounts payable and accrued liabilities and
accounts payable to related party amounts approximate their fair values due to the immediate or short-term maturities of these financial
instruments. We do not have any financial instruments for which estimates of fair value disclosures utilize Level 2 and 3 inputs.
Use of estimates
These consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States. Certain
amounts included in or affecting the financial statements and related disclosures must be estimated by management, requiring certain
assumptions with respect to values or conditions which cannot be known with certainty at the time the financial statements are prepared. These
estimates and assumptions affect the amounts reported for assets and liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements. 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.
Impairment of long-lived assets
The Company evaluates the carrying value and recoverability of its long-lived assets when circumstances warrant such evaluation by applying the
provisions of the FASB ASC regarding long-lived assets. It requires that long-lived assets be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not be recoverable through the estimated undiscounted cash flows
expected to result from the use and eventual disposition of the assets. Whenever any such impairment exists, an impairment loss will be
recognized for the amount by which the carrying value exceeds the fair value.
Income Taxes
The Company accounts for income taxes in accordance with the FASB ASC Topic 740. The Company records a valuation allowance against net
deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and when temporary differences become
deductible. The Company considers, among other available information, uncertainties surrounding the recoverability of deferred tax assets,
scheduled reversals of deferred tax liabilities, projected future taxable income, and other matters in making this assessment.
As part of the process of preparing its consolidated financial statements, the Company is required to estimate its income taxes in each of the
jurisdictions in which it operates. This process requires the Company to estimate its actual current tax liability and to assess temporary
differences resulting from differing book versus tax treatment of items, such as deferred revenue, compensation and benefits expense and
depreciation. These temporary differences result in deferred tax assets and liabilities, which are included within the Company’s consolidated
statements of financial condition. Significant management judgment is required in determining the Company’s provision for income taxes, its
deferred tax assets and liabilities and any valuation allowance recorded against its net deferred tax assets. In assessing the realization of
deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized
and, when necessary, valuation allowances are established. The ultimate realization of the deferred tax assets is dependent upon the generation
of future taxable income during the periods in which temporary differences become deductible. Management considers the level of historical
taxable income, scheduled reversals of deferred taxes, projected future taxable income and tax planning strategies that can be implemented by
the Company in making this assessment. If actual results differ from these estimates or the Company adjusts these estimates in future periods,
the Company may need to adjust its valuation allowance, which could materially impact the Company’s consolidated financial position and results
of operations.
F-10
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
VERTEX ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012
Tax contingencies can involve complex issues and may require an extended period of time to resolve. Changes in the level of annual pre-tax
income can affect the Company’s overall effective tax rate. Significant management judgment is required in determining the Company’s provision
for income taxes, its deferred tax assets and liabilities and any valuation allowance recorded against its net deferred tax assets. Furthermore, the
Company’s interpretation of complex tax laws may impact its recognition and measurement of current and deferred income taxes.
Stock based compensation
The Company accounts for share-based expense and activity in accordance with FASB ASC Topic 718, which establishes accounting for equity
instruments exchanged for services. Under this provision, share-based compensation costs are measured at the grant date, based on the
calculated fair value of the award, and are recognized as an expense over both the employee and non-employee’s requisite service period,
generally the vesting period of the equity grant.
The Company estimates the fair value of stock options using the Black-Scholes valuation model. Key input assumptions used to estimate the fair
value of stock options include the exercise price of the award, expected option term, expected volatility of the stock over the option’s expected
term, risk-free interest rate over the option’s expected term, and the expected annual dividend yield. The Company believes that the valuation
technique and approach utilized to develop the underlying assumptions are appropriate in calculating the fair values of the stock options granted.
Earnings per share
The Company has adopted FASB ASC Topic 260, which provides for the calculation of basic and diluted earnings per share. Basic and diluted
loss per share has been calculated based on the weighted average number of shares of common stock outstanding during the period.
NOTE 3. RELATED PARTIES
Prior to the Acquisition (described below in Note 15), the Company had numerous transactions with Vertex Holdings, L.P., formerly Vertex
Energy, L.P. (also defined herein as the “Partnership” or “Vertex LP”), including the lease of the Partnership’s storage facility, subletting of office
space, transportation of feedstock to re-refiners and the Company’s storage facility, and delivery from the Company’s re-refinery to end customers.
The pricing under these contracts was with certain wholly-owned subsidiaries of the Partnership and was priced at market, and reviewed
periodically from time to time by the Board of Director’s Related Party Transaction committee. The Related Party Transaction committee includes
at least two independent directors and will review and pre-approve any and all related party transactions.
The consolidated financial statements include revenues from related parties of $0 and $17,978 and inventory purchases from related parties of
$9,569,772 and $12,678,982 for the years ended December 31, 2012 and 2011, respectively. The Company also incurred process costs of
$5,331,195 and $7,395,849 for the years ended December 31, 2012 and 2011, respectively. The costs arise from the TCEP operating agreement
with CMT (which entity was acquired as part of the Acquisition), whereby we pay up to $0.40 per gallon of processing costs.
F-11
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
VERTEX ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012
The Company subleased office space from Vertex LP. Rental payments under the lease were $6,600 per month and the lease was to expire in
June 2013 (the lease was acquired as part of the Acquisition).
The Company leased approximately 30,000 barrels in storage capacity for its Black Oil division at CMT, located in Baytown, Texas. The monthly
lease expense was $22,500 and the lease expired in March 2011; however, the parties agreed to an extension of the lease with the same terms
and conditions through June 2012. CMT was acquired as part of the Acquisition.
The Company leased approximately 45,000 barrels in storage capacity for its TCEP division at CMT, located in Baytown, Texas. The monthly
lease expense was $45,000 and the lease expired in March 2011; however, the parties agreed to an extension of the lease with the same terms
and conditions through August 2012, other than an increase in the monthly lease expense to $49,500 in consideration for an additional rental of
3,000 barrels of capacity. CMT was acquired as part of the Acquisition.
NOTE 4. CONCENTRATIONS, SIGNIFICANT CUSTOMERS, COMMITMENTS AND CONTINGENCIES
The Company has concentrated credit risk for cash by maintaining deposits in one bank. These balances are insured by the Federal Deposit
Insurance Corporation up to $250,000. From time to time during the year ended December 31, 2012, the Company’s cash balances exceeded
the federally insured limits. No losses have been incurred relating to this concentration.
At December 31, 2012 and 2011 and for the years then ended, the Company’s revenues and receivables were comprised of the following
customer concentrations:
Customer 1
Customer 2
Customer 3
Customer 4
Customer 5
2012
2011
% of
Revenues
31%
25%
13%
12%
4%
% of
Receivables
0%
54%
0%
15%
12%
% of
Revenues
49%
5%
12%
10%
6%
% of
Receivables
44%
15%
15%
16%
0%
The Company purchases goods and services from two companies that represented 11% and 10% of total purchases for the year ended
December 31, 2012 and 18% and 11% of total purchases for the year ended December 31, 2011.
The Company has had various debt facilities available for use, of which there was $14,780,786 and $0 outstanding as of December 31, 2012 and
December 31, 2011, respectively. See Note 8 for further details.
The Company’s revenue, profitability and future rate of growth are substantially dependent on prevailing prices for petroleum-based
products. Historically, the energy markets have been very volatile, and there can be no assurance that these prices will not be subject to wide
fluctuations in the future. A substantial or extended decline in such prices could have a material adverse effect on the Company’s financial
position, results of operations, cash flows, and access to capital and on the quantities of petroleum-based products that the Company can
economically produce.
F-12
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
VERTEX ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012
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 intend to take advantage of any potential tax benefits related to net operating losses (“NOLs”) acquired as part of the Company's April 2009
merger with World Waste Technologies, Inc. ("World Waste"). As a result of the merger we acquired approximately $42 million of net operating
losses that may be used to offset taxable income generated by the Company in future periods.
It is possible that the Company may be unable to use these NOLs in their entirety. The extent to which the Company will be able to utilize these
carry-forwards in future periods is subject to limitations based on a number of factors, including the number of shares issued within a three-year
look-back period, whether the merger is deemed to be a change in control, whether there is deemed to be a continuity of World Waste’s historical
business, and the extent of the Company’s subsequent income. As of December 31, 2011, the Company had utilized approximately $4.4 million of
these NOLs leaving approximately $35.4 million of potential NOLs of which we expect to utilize approximately $1.5 million for the year ended
December 31, 2012.
Leases
The Company has various leases for office facilities, vehicles and lab equipment which are classified as operating leases, and which expire at
various times through 2017. Related party leases include office facilities and tank rental (from CMT, which was acquired as part of the
Acquisition). Total rent expense for all operating leases for 2012 and 2011, is summarized as follows:
2012
2011
629,904
100,405
33,012
763,321
$
$
876,048
-
-
876,048
Office
Facilities
303,284
304,547
302,609
304,672
212,249
-
1,427,361
$
Vehicles/Lab
99,035
99,035
88,265
100,688
-
-
387,023
$
Related party leases
Office leases
Vehicle leases
Minimum future lease commitments as of December 31, 2012, are summarized as follows:
Year ending December 31
2013
2014
2015
2016
2017
thereafter
$
$
$
$
F-13
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
NOTE 5. FIXED ASSETS
Fixed assets consist of the following:
Equipment
Furniture and fixtures
Leasehold improvements
Office equipment
Vehicles
Construction in progress
Land
Total fixed assets
Less accumulated depreciation
Net fixed assets
Useful Life
(in years)
7-20
7
15
5
5
$
$
December 31,
2012
4,423,133
83,887
1,866,702
302,668
2,250,300
1,030,845
1,995,000
11,952,535
(335,167)
$ 11,617,368 $
December 31,
2011
-
28,527
-
135,856
-
-
-
164,383
(40,215)
124,168
Depreciation expense was $295,801 and $15,177 for the years ended December 31, 2012 and 2011, respectively.
Equipment under construction in progress is related to TCEP technology improvements.
NOTE 6. GOODWILL
At December 31, 2012 and 2011, goodwill totaled $3,515,977 and $0, respectively. The increase in goodwill during 2012 is attributable to the
Acquisition of Vertex Acquisition Sub, LLC (as described in Note 15). The excess purchase price over the value of the net tangible assets and
intangible assets was recorded to goodwill. The goodwill has been allocated to the Black Oil reporting segment.
NOTE 7. INTANGIBLE ASSETS
Components of intangible assets (all subject to amortization) consist of the following items:
Customer relations
Vendor relations
H&H Oil Trademark/Trade name
TCEP Technology/Patent
Non-compete agreements
December 31, 2012
Useful Life
(in years)
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
5
10
16
15
3
343,000 $
$
4,064,000
775,000
11,000,000
73,000
$16,255,000 $
325,850
17,150 $
101,600 3,962,400
12,110
762,890
183,333 10,816,667
66,917
320,276 $15,934,724
6,083
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 $320,276 and $0 for the twelve months ended December 31, 2012 and 2011, respectively.
Estimated future amortization expense is as follows:
2013
2014
2015
2016
2017
thereafter
$
$
1,281,104
1,281,104
1,275,021
1,256,771
1,239,621
9,601,103
15,934,724
F-14
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
VERTEX ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012
NOTE 8. LINE OF CREDIT AND LONG-TERM DEBT
In September 2010, the Company entered into a loan agreement and obtained a line of credit with Bank of America Merrill Lynch. On March 30,
2012, Bank of America renewed the line of credit through March 31, 2014. The loan agreement was guaranteed by CMT, a former related party of
the Company (CMT was acquired as part of the Acquisition). The most restrictive covenants of the loan required an interest coverage ratio of at
least 1.5 to 1 and a funded debt to EBITDA ratio not to exceed 2 to 1. This line of credit was replaced with a new agreement in September 2012,
as described below.
In September 2012, the Company entered into a credit agreement with Bank of America. Pursuant to the agreement, Bank of America agreed to
loan the Company $8,500,000 in the form of a term loan and to provide the Company with an additional $10,000,000 in the form of a revolving line
of credit, to be used for feedstock purchases and general corporate purposes. The line of credit bears interest at the option of the Company of
either the lender's prime commercial lending rate in effect or the Bank of America LIBOR rate plus 2.75%. Accrued and unpaid interest on the
revolving note is due and payable monthly in arrears and all amounts outstanding under the revolving note are due and payable on August 31,
2014. The balance on the revolving line of credit is $6,750,000 at December 31, 2012.
Amounts borrowed under the term note bear interest at the option of the Company of either the lender's prime commercial lending rate then in
effect or the Bank of America LIBOR rate plus 2.75%. Accrued and unpaid interest on the term note is due and payable monthly in arrears and all
amounts outstanding under the term note are due and payable on August 31, 2015. Additionally, payments of principal in the amount of $141,667
are due and payable on the term note monthly in arrears on the last day of each month and continuing until the maturity date. The balance of the
term loan is $7,933,333 at December 31, 2012.
The financing arrangement discussed above is secured by all of the assets of the Company. The loan contains certain restrictive covenants
including a Fixed Charge Coverage Ratio, as defined in the agreement, of at least 1.25 to 1.00, and a Senior Funded Debt to EBITDA Ratio, as
defined in the agreement, not to exceed 2.00 to 1.00. A tangible net worth requirement was included in the credit agreement in error. This
requirement was waived and the credit agreement was amended in January 2013. The Company believes it was in compliance with all aspects of
the agreement at December 31, 2012.
The Company has notes payable to various financial institutions, bearing interest at rates ranging from 10.46% to 10.90%, maturing
from August, 2014 to January, 2015. The balance of the notes payable is $97,453 at December 31, 2012.
Future maturities of long term debt as of December 31, 2012 were as follows:
Year Ending December 31,
2013
2014
2015
Total debt
Less current maturities
Long-term debt
NOTE 9. INCOME TAXES
$
$
$
1,749,329
1,746,354
4,535,103
8,030,786
(1,749,329)
6,281,457
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Income tax expense (benefit) attributable to income from continuing operations differed from the amounts computed by applying the U.S. Federal
income tax of 34% to pretax income from continuing operations as a result of the following:
December 31,
2012
768,000 $
44,000
(812,000)
(1,408,000)
7,359
(1,400,641) $
December 31, 2011
1,330,000
31,000
(1,361,000)
(1,823,000)
(18,813)
(1,841,813)
Statutory tax on book income
Nondeductible expenses
Net operating loss utilization
Reduction in valuation allowance
Other
Income tax benefit
$
$
F-15
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
VERTEX ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012
The components of income tax (benefit) expense for the years ended December 31, 2012 and 2011 are as follows:
Current federal tax expense
Deferred federal tax benefit
Total federal tax benefit
$
$
December 31,
2012
31,359 $
(1,432,000)
(1,400,641) $
December 31, 2011
88,187
(1,930,000)
(1,841,813)
The cumulative tax effect of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at
December 31, 2012 and 2011, are presented below:
Deferred tax assets:
Alternative minimum tax credits
Accrued compensation
Net operating loss carry forwards
Less valuation allowance
Net deferred tax assets
Deferred tax liabilities:
Accelerated tax depreciation
Net deferred tax liabilities
December 31,
2012
December 31, 2011
130,000 $
173,000
11,536,000
(8,136,000)
3,703,000 $
107,000
199,000
12,056,000
(10,356,000)
2,006,000
December 31,
2012
December 31, 2011
341,000 $
341,000 $
76,000
76,000
$
$
$
$
The Company has determined that a valuation allowance of approximately $8,136,000 at December 31, 2012 is necessary to reduce the deferred
tax assets to the amount that will more than likely not be realized. The change in the valuation allowance for 2012 was approximately $2,220,000.
Net operating losses utilized in 2011 were approximately $4,400,000.
At December 31, 2012, the Company had federal net operating loss carry-forwards ("NOLs") of approximately $33.9 million acquired as part of the
Merger between World Waste and the Company's wholly-owned subsidiary Vertex Merger Sub, LLC. It is possible that the Company may be
unable to use these NOLs in their entirety. The history of these NOLs and the related tax laws are complex and the Company is researching the
facts and circumstances as to whether the Company will ultimately be able to utilize the benefit from these NOLs. The extent to which the
Company will be able to utilize these carry-forwards in future periods is subject to limitations based on a number of factors, including the number
of shares issued within a three-year look-back period, whether the merger is deemed to be a change in control, whether there is deemed to be a
continuity of World Waste's historical business, and the extent of the Company's subsequent income.
F-16
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
VERTEX ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012
NOTE 10. STOCK BASED COMPENSATION
The stock based compensation cost that has been charged against income by the Company was $178,968 and $138,859 for the years ended
December 31, 2012 and 2011, respectively, for options previously awarded by the Company.
Stock option activity for the years ended December 31, 2012 and 2011 are summarized as follows:
Outstanding at December 31, 2011
Options granted
Options exercised
Options cancelled/forfeited/expired
Outstanding at December 31, 2012
Vested at December 31, 2012
Exercisable at December 31, 2012
Outstanding at December 31, 2010
Options granted
Options exercised
Options cancelled/forfeited/expired
Outstanding at December 31, 2011
Vested at December 31, 2011
Exercisable at December 31, 2011
Weighted
Average
Weighted
Average
Remaining
Contractual
Shares
Exercise Price
Life (in Years)
Grant Date Fair
Value
3,073,334
225,000
(65,000)
(294,167)
2,939,167
$
$
2,283,237
$
2,283,237
$
5.46
1.91
(1.47)
(1.21)
5.70
6.89
6.89
7.00
10.00
-
-
6.50
$
$
990,995
197,146
(5,239)
(38,878)
1,144,024
6.41
$
709,902
6.41
$
709,902
Weighted
Average
Shares
Exercise Price
Weighted
Average
Remaining
Contractual
Life (in Years)
Grant Date Fair
Value
2,703,334
390,000
(5,000)
(15,000)
3,073,334
$
$
1,847,902
$
1,847,902
$
5.81
2.77
(.45)
(.62)
5.46
8.20
8.20
7.60
10.00
(7.94)
-
7.00
$
$
715,826
283,591
(1,800)
(6,622)
990,995
6.21
$
365,798
6.21
$
365,798
A summary of the Company’s stock warrant activity and related information for the years ended December 31, 2012 and 2011 are as follows:
Outstanding at December 31, 2011
Warrants exercised
Warrants cancelled/forfeited/expired
Warrants at December 31, 2012
Weighted
Average
Weighted
Average
Remaining
Contractual
Shares
Exercise Price
Life (in Years)
Grant Date Fair
Value
1,245,311
(37,500)
(44,503)
1,163,308
$
$
12.48
(1.08)
(25.00)
12.37
1.41
-
-
0.40
$
$
142,065
(10,626)
(2,550)
128,889
Vested at December 31, 2012
1,150,808
$
12.50
0.41
$
123,289
Exercisable at December 31, 2012
1,150,808
$
12.50
0.41
$
123,289
Outstanding at December 31, 2010
Warrants granted
Warrants exercised
Warrants cancelled/forfeited/expired
Warrants at December 31, 2011
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Weighted
Average
Weighted
Average
Remaining
Contractual
Shares
Exercise Price
Life (in Years)
Grant Date Fair
Value
1,773,457
$
25,000
(190,000)
(363,146)
1,245,311
$
14.24
1.75
(1.60)
(26.02)
12.48
1.96
$
172,973
4.00
(1.64)
-
1.41
$
11,201
(20,320)
(21,789)
142,065
Vested at December 31, 2011
1,169,278
$
13.23
1.35
$
122,150
Exercisable at December 31, 2011
1,169,278
$
13.23
1.35
$
122,150
F-17
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
VERTEX ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012
The following table summarizes the assumptions used in assessing the above described option and warrant valuations:
YEAR ENDED
DECEMBER 31,
2012
YEAR ENDED
DECEMBER 31,
2011
Expected volatility
Expected dividends
Expected term (in years)
Risk-free rate
35-39%
0%
10
31-35%
0%
4
0.35-0.39%
0.37-1.03%
NOTE 11. 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. The calculation of basic earnings per share for the year ended December 31,
2012 includes the weighted average of common shares outstanding. Diluted earnings per share reflect 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. The calculation of
diluted earnings per share for the year ended December 31, 2012 does not include options to purchase 1,901,174 shares and warrants to
purchase 986,287 shares due to their anti-dilutive effect.
The following is a reconciliation of the numerator and denominator for basic and diluted earnings per share for the year ended December 31, 2012
and 2011:
Basic Earnings per Share
Numerator:
Net income available to common shareholders
Denominator:
Weighted-average common shares outstanding
Basic earnings per share
Diluted Earnings per Share
Numerator:
Net income available to common shareholders
Denominator:
Weighted-average shares outstanding
Effect of dilutive securities
Stock options and warrants
Preferred stock
Diluted weighted-average shares outstanding
2012
2011
$
3,658,267 $
5,753,515
12,138,229
8,884,681
$
0.30 $
0.65
$
3,658,267
$
5,753,515
12,138,229
8,884,681
1,215,014
1,512,891
1,464,019
4,426,639
14,866,134
14,775,339
Diluted earnings per share
$
0.25
$
0.39
F-18
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
NOTE 12. COMMON STOCK
VERTEX ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012
The total number of authorized shares of the Company’s common stock is 750,000,000 shares, $0.001 par value per share. As of December 31,
2012, there were 16,965,464 common shares issued and outstanding.
Each share of the Company's common stock is entitled to equal dividends and distributions per share with respect to the common stock when, as
and if declared by the Company's board of directors. No holder of any shares of the Company's common stock has a preemptive right to
subscribe for any of the Company's securities, nor are any shares of the Company's common stock subject to redemption or convertible into other
securities. Upon liquidation, dissolution or winding-up of the Company and after payment of creditors and preferred shareholders of the Company,
if any, the assets of the Company will be divided pro rata on a share-for-share basis among the holders of the Company's common stock. Each
share of the Company's common stock is entitled to one vote. Shares of the Company's common stock do not possess any cumulative voting
rights.
During the year ending December 31, 2012 there were 2,913,748 shares of the Company's Series A Preferred Stock converted into 2,913,748
shares of the the Company's common stock; warrants and options to purchase 87,500 shares of the Company's common stock were exercised for
cash proceeds of $112,625; options to purchase 15,000 shares of common stock were exercised for a net of 3,835 shares of common stock (when
adjusting for a cashless exercise of such options and the payment, in shares of common stock, of an aggregate exercise price of $23,250 in
connection with such exercises) and 3,835 shares of common stock were issued to the option holder in connection with such exercise; and
4,545,455 restricted shares were issued as consideration for the Acquisition, described in Note 15.
NOTE 13. PREFERRED STOCK
The total number of authorized shares of the Company’s preferred stock is 50,000,000 shares, $0.001 par value per share. The total number of
designated shares of the Company’s Series A Preferred Stock is 5,000,000 (“Series A Preferred”). The total number of designated shares of the
Company’s Series B Preferred Stock is 2,000,000. As of December 31, 2012, there were 1,512,891 shares of Series A Preferred Stock issued and
outstanding and no Series B Preferred shares issued and outstanding.
Series A Preferred
Holders of outstanding shares of Series A Preferred are entitled to receive dividends, when, as, and if declared by our Board of Directors. No
dividends or similar distributions may be made on shares of capital stock or securities junior to our Series A Preferred until dividends in the same
amount per share on our Series A Preferred have been declared and paid. In connection with a liquidation, winding-up, dissolution or sale of the
Company, each share of our Series A Preferred is entitled to receive $1.49 prior to similar liquidation payments due on shares of our common
stock or any other class of securities junior to the Series A Preferred. Shares of Series A Preferred are not entitled to participate with the holders
of our common stock with respect to the distribution of any remaining assets of the Company.
Each share of Series A Preferred is entitled to that number of votes equal to the number of whole shares of common stock into which it is
convertible. Generally, holders of our common stock and Series A Preferred vote together as a single class.
Shares of Series A Preferred automatically convert into shares of our common stock on the earliest to occur of the following:
The affirmative vote or written consent of the holders of a majority of the then-outstanding shares of Series A Preferred;
If the closing market price of our common stock averages at least $15.00 per share over a period of 20 consecutive trading days and
the daily trading volume averages at least 7,500 shares over such period;
If we consummate an underwritten public offering of our securities at a price per share not less than $10.00 and for a total gross
offering amount of at least $10 million; or
If a sale of the Company occurs resulting in proceeds to the holders of Series A Preferred of a per share amount of at least $10.00.
·
·
·
·
Each share of Series A Preferred converts into one share of common stock, subject to adjustment.
Series B Preferred Stock
The Series B Preferred Stock have the following rights, preferences and limitations:
·
·
The Series B Preferred Stock includes a liquidation preference which is junior to the Company’s previously outstanding shares of
preferred stock, senior securities and other security holders as provided in further detail in the Designation;
The Series B Preferred Stock is convertible into shares of the Company’s common stock on a one for one basis at a conversion price of
$1.00 per share, provided that the Series B Preferred Stock automatically converts into shares of the Company’s common stock on a
one for one basis if the Company’s common stock trades above $2.00 per share for a period of 10 consecutive trading days;
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
·
·
The Series B Preferred Stock has no voting rights (other than on matters concerning the Series B Preferred Stock as further described
in the Designation); and
The Company was obligated to redeem any unconverted shares of Series B Preferred Stock in cash at $1.00 per share on the third
anniversary date of the original issuance date of each share of Series B Preferred Stock.
F-19
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
VERTEX ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012
NOTE 14. LICENSING AGREEMENT
Until the Acquisition (described in Note 15, below), the Company operated under an operating and licensing agreement with a related party that is
majority-owned and controlled by the Company’s Chief Executive Officer and Chairman, Benjamin P. Cowart, that provided for an irrevocable,
non-transferable, royalty-free, perpetual right to use TCEP to re-refine certain used oil feedstock and associated operations of this technology on a
global basis. This included the right to utilize the technology in any future production facilities built by the Company.
The initial valuation of the license was based upon the cost to acquire the use of TCEP and its processes. It will be assessed over time for
changes in the valuation. Additional development costs capitalized during the year ended December 31, 2012 and 2011 were $209,062 and
$241,454, respectively. Prior to the Acquisition, the Company amortized the value of the license agreement over a fifteen year
period. Amortization expense was $95,478 and $145,871 for the years ending December 31, 2012 and 2011, respectively. The unamortized
basis of the licensing agreement, approximately $2,043,000, was reclassified to intangible assets at the Acquisition, as discussed in Note 15.
NOTE 15. ACQUISITION
On September 11, 2012, but effective August 31, 2012, the Company acquired 100% of the outstanding equity interests of Vertex Acquisition Sub,
LLC (“Acquisition Sub” and the "Acquisition"), a special purpose entity consisting of substantially all of the assets of Vertex LP and real-estate
properties owned by B & S Cowart Family L.P. ("B&S LP") in consideration for $28,791,000, consisting of $16,500,000 plus a working capital
adjustment of approximately $467,000, 4,545,455 restricted shares of common stock valued at $7,113,000, and contingent consideration of
$4,711,000. Prior to closing the Acquisition, Vertex LP contributed to Acquisition Sub substantially all of its assets and liabilities relating to the
business of transporting, storing, processing and re-refining petroleum products, crudes and used lubricants, including all of the outstanding equity
interests in Vertex LP’s wholly-owned operating subsidiaries, Cedar Marine Terminals, L.P. (“CMT”), Crossroad Carriers, L.P., Vertex Recovery
L.P. and H&H Oil, L.P. and B&S LP contributed real estate associated with the operations of H&H Oil, L.P.
The Acquisition was accounted for under the purchase method of accounting, with the Company identified as the acquirer, and the operating
results of the Acquisition Sub have been included in the Company's consolidated financial statements as of the effective date of the Acquisition.
Under the purchase method of accounting, the aggregate amount of consideration paid by the Company was allocated to the Acquisition Sub’s net
tangible assets and intangible assets based on their estimated fair values as of August 31, 2012. The excess purchase price over the value of the
net tangible assets and intangible assets was recorded to goodwill. The goodwill has been allocated to the Refining and Marketing reporting
segment. The Company retained an independent third-party appraiser to assist management in its valuation. The allocation of the purchase price
is based on the best estimates of management.
The following information summarizes the allocation of the fair values assigned to the assets at the purchase date. The allocation of fair values are
preliminary and are subject to change in the future during the measurement period.
Cash and cash equivalents
Accounts receivable
Inventory
Prepaid expenses
Property, plant and equipment
Land
Other assets
Intangible assets
Goodwill
Total identifiable net assets
Less liabilities assumed
Total purchase price
(in thousands)
663
1,853
13
61
8,659
1,995
32
14,212
3,516
31,004
(2,213)
28,791
$
$
The Company incurred approximately $1,256,576 in costs associated with the Acquisition. These included legal, accounting, environmental,
investment banking, and related party transaction committee costs.
The following table summarizes the cost of amortizable intangible assets related to the Acquisition of Acquisition Sub:
Customer relations
Vendor relations
H&H Oil Trademark/Trade name
TCEP Technology/Patent
Non-competes
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
$
Estimated
Cost
(in thousands)
343
4,064
775
8,957
73
Useful life
(years)
5
10
16
15
3
Total
$
14,212
F-20
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
VERTEX ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012
The following unaudited pro-forma consolidated results of operations for the years ended December 31, 2012 and 2011 assume the Acquisition
occurred as of January 1, 2011. The pro forma results of operations are presented for informational purposes only and are not indicative of the
results of operations that would have been achieved if the Acquisition had taken place on January 1, 2011 or of results that may occur in the future
(amounts in thousands other than earnings per share):
Revenue
Cost of goods sold
Gross profit
Selling, general and administrative expenses
Income from operations
Other income and expense
Net income
Earnings per common share-Basic
Earnings per common share-Diluted
NOTE 16. CONTINGENT CONSIDERATION
$
Twelve Months Ended December
2012
(unaudited)
2011
(unaudited)
142,199,659 $
125,781,532
16,418,127
9,823,076
6,595,051
630,216
7,225,267
118,817,983
100,638,913
18,179,070
8,408,591
9,770,479
949,036
10,719,515
0.60
0.49
1.21
0.73
As part of the consideration paid in connection with the Acquisition discussed in Note 15, if certain earning targets are met, the Company has to
pay the seller approximately $2,233,000 annually in 2013, 2014 and 2015. The Company has recorded contingent consideration of $4,711,000,
which is the discounted cash flows of the earn out payments.
F-21
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
VERTEX ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012
NOTE 17. SEGMENT REPORTING
The Company’s reportable segments include the Black Oil and Refining & Marketing divisions. Segment information for the years ended
December 31, 2012 and 2011, are as follows:
YEAR ENDED DECEMBER 31, 2012
Revenues
Black Oil
$ 90,237,692
Refining &
Marketing
$ 44,335,551
Total
$ 134,573,243
Net income (loss) from operations
$
(770,900)
$
3,162,150
$
2,391,250
Total Assets
$ 44,848,295
$
4,254,082 $ 49,102,377
YEAR ENDED DECEMBER 31, 2011
Revenues
Net income from operations
Total Assets
NOTE 18. SUBSEQUENT EVENTS
Black Oil
$ 72,349,181
Refining &
Marketing
$ 37,391,076
Total
$ 109,740,257
$
1,368,575
$
2,605,813
$
3,974,388
$
9,196,208 $
7,537,763 $ 16,733,971
Subsequent to December 31, 2012, the available credit on the Line of Credit is $10,000,000. As of March 20, 2013, the outstanding balance
drawn on the line of credit is $5,500,000 leaving an available balance for draw downs of $4,500,000.
Subsequent to December 31, 2012, a total of 83,968 shares of the Company’s Series A Preferred Stock were converted into 83,968 shares of the
Company’s common stock and warrants to purchase 175,000 shares of the Company’s common stock were exercised for a net of 102,484 shares
of common stock (when adjusting for a cashless exercise of such warrants and the payment, in shares of common stock, of an aggregate exercise
price of $256,250 in connection with such exercise) and 102,484 shares of common stock were issued to the warrant holders in connection with
such exercises; and options to purchase 35,000 shares of the Company’s common stock were exercised for a net of 24,085 shares of common
stock (when adjusting for a cashless exercise of such options and the payment, in shares of common stock, of an aggregate exercise price of
$39,500 in connection with such exercise) and 24,085 shares of common stock were issued to the option holders in connection with such
exercises.
On January 1, 2013, the Company purchased two trucks, miscellaneous operating assets and a used oil collection customer base from a used oil
collection company in the Houston, Texas area. The Company paid $123,845 for the business and has consideration of $33,850 due contingent
on this customer base producing a specified number of gallons per month for three months. The portion of the acquired company was immediately
integrated into the Company's operations as part of the H&H Oil collection business.
F-22
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Principal Executive Officer and Principal Financial Officer, evaluated the effectiveness of
our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as
of the end of the period covered by this Annual Report on Form 10-K. In designing and evaluating the disclosure controls and procedures,
management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource
constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their
costs.
Based on our evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and
procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to
disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure.
Management’s Annual Report on Internal Control over Financial Reporting
We regularly review our system of internal control over financial reporting to ensure we maintain an effective internal control environment.
There were no changes in our internal control over financial reporting that occurred during the period covered by this Annual Report on Form 10-K
that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules
13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. Our internal control over financial reporting is designed to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with U.S. generally accepted accounting principles.
Our internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that in
reasonable detail accurately and fairly reflect the transactions and dispositions of our assets, (ii) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our
receipts and expenditures are being made only in accordance with authorizations of our management and directors, and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect
on our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of
any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
Management, including our principal executive officer and principal financial officer, assessed the effectiveness of our internal control over
financial reporting as of December 31, 2012. In making this assessment, management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control over Financial Reporting - Guidance for Smaller Public Companies.
There were no changes in our internal controls over financial reporting during the quarter ended December 31, 2012. Based on our
assessment and those criteria, our management believes that we maintained effective internal control over financial reporting as of December 31,
2012.
42
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
This annual report does not include an attestation report of the Company's registered public accounting firm regarding internal control
over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to rules
of the Securities and Exchange Commission that permit us to provide only management's report in this annual report.
Item 9B. Other Information
None.
43
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Item 10. Directors, Executive Officers and Corporate Governance
Part III
The information required by this Item will be set forth under the headings “Election of Directors”, “Executive Officers”, “Corporate
Governance”, and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s 2013 Proxy Statement to be filed with the U.S.
Securities and Exchange Commission (“SEC”) within 120 days after December 31, 2012 in connection with the solicitation of proxies for the
Company’s 2013 annual meeting of shareholders and is incorporated herein by reference.
Item 11. Executive Compensation
The information required by this Item will be set forth under the headings “Executive Compensation”, “Board of Directors Compensation”
and “Outstanding Equity Awards at Fiscal Year-End” in the Company’s 2013 Proxy Statement to be filed with the SEC within 120 days after
December 31, 2012 and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and related Stockholder Matters
The information required by this Item will be set forth under the headings “Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters” in the Company’s 2013 Proxy Statement to be filed with the SEC within 120 days after December
31, 2012 and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item will be set forth under the headings “Certain Relationships and Related Transactions” and “Director
Independence” in the Company’s 2013 Proxy Statement to be filed with the SEC within 120 days after December 31, 2012 and is incorporated
herein by reference.
Item 14. Principal Accounting Fees and Services
The Company appointed LBB & Associates Ltd., LLP as independent auditors to audit the consolidated financial statements of the
Company for the fiscal years ended December 31, 2012 and December 31, 2011.
Following is a summary of the fees expensed relating to professional services rendered by the principal accountants for the fiscal years
ended December 31, 2012 and December 31, 2011:
Fee Category
2012 Fees
2011
Fees
Audit Related Fees
All Other Fees
$
$
96,639 $ 68,000
14,035 $ 25,915
Total Fees
$ 110,674 $ 93,915
44
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Part IV
Item 15. Exhibits, Financial Statement Schedules
(a) Documents filed as part of this report
(1) All financial statements
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2012 and 2011
Consolidated Statements of Operations for the years ended December 31, 2012 and 2011
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2012 and 2011
Consolidated Statements of Cash Flows for the years ended December 31, 2012 and 2011
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
Page
F-2
F-3
F-4
F-5
F-6
F-7
All financial statement schedules have been omitted, since the required information is not applicable or is not present in amounts sufficient to
require submission of the schedule, or because the information required is included in the consolidated financial statements and notes thereto
included in this Form 10-K.
(3) Exhibits required by Item 601 of Regulation S-K
The information required by this Section (a)(3) of Item 15 is set forth on the exhibit index that follows the Signatures page of this Form 10-K.
45
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: March 21, 2013
Date: March 21, 2013
VERTEX ENERGY, INC.
By: /s/ Benjamin P. Cowart
Benjamin P. Cowart
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Chris Carlson
Chris Carlson
Chief Financial Officer
(Principal Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
By:
/s/ Benjamin P. Cowart
Benjamin P. Cowart
Chief Executive Officer
(Principal Executive Officer)
and Chairman
By:
/s/ Chris Carlson
Chris Carlson
Chief Financial Officer
(Principal Accounting Officer)
Date: March 21, 2013
Date: March 21, 2013
By:
/s/ Christopher Stratton
Christopher Stratton
Director
By:
/s/ Dan Borgen
Dan Borgen
Director
Date: March 21, 2013
Date: March 21, 2013
By:
/s/ John Pimentel
John Pimentel
Director
By:
/s/ David Phillips
David Phillips
Director
Date: March 21, 2013
Date: March 21, 2013
By:
/s/ Timothy C. Harvey
Timothy C. Harvey
Director
Date: March 21, 2013
46
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
2.1
2.2
3.1
3.2
3.3
10.1
10.2
10.3
10.4
10.5(+)
10.6(+)
10.7
10.8
10.9
10.10
Exhibit
Number
Description of Exhibit
Unit Purchase Agreement by and among Vertex
Energy, Inc., Vertex Acquisition Sub, LLC, Vertex
Holdings, L.P. and B & S Cowart Family L.P. dated as
of August 14, 2012
First Amendment to Unit Purchase Agreement by and
among Vertex Energy, Inc., Vertex Acquisition Sub,
LLC, Vertex Holdings, L.P. and B & S Cowart Family
L.P. dated as of September 11, 2012
Articles of Incorporation (and amendments thereto) of
Vertex Energy, Inc.
Amended and Restated Certificate of Designation of
Rights, Preferences and Privileges of Vertex Energy,
Inc.'s Series A Convertible Preferred Stock.
EXHIBIT INDEX
Filed or Furnished
Herewith
Incorporated by Reference
Filing Date/Period
End Date
Form Exhibit
File No.
8-K
2.1
8/15/12
000-53619
8-K
2.2
9/12/12
000-53619
8-K/A
3.1
6/26/09
000-53619
8-K
3.1
7/16/10
000-53619
Bylaws of Vertex Energy, Inc.
8-K/A
3.4
6/26/09
000-53619
Employment Agreement with Benjamin P. Cowart
effective April 16, 2009 ***
Employment Agreement with Matthew Lieb effective
April 16, 2009 ***
Loan Agreement with Bank of America dated
September 16, 2010
Security Agreement with Bank of America dated
September 16, 2010
Tolling (Processing) Agreement with KMTEX effective
July 1, 2009
First Amendment to Processing Agreement with
KMTEX effective July 1, 2010
Amended and Restated Employment Agreement with
Chris Carlson dated March 29, 2011 and effective April
1, 2010***
First Amendment to Employment Agreement with
Benjamin P. Cowart dated March 25, 2011 and
effective as of December 15, 2010***
First Amendment to Employment Agreement with Matt
Lieb dated February 1, 2011 and effective March 28,
2011***
Addendum to The Employment Agreement Between
Vertex Energy, Inc. and Greg Wallace dated July 5,
2011***
47
8-K/A
10.5
6/26/09
000-53619
8-K/A
10.7
6/26/09
000-53619
8-K
10.1
9/24/10
000-53619
8-K
10.2
9/24/10
000-53619
10-K
10.14
12/31/04
000-53619
10-K
10.15
12/31/04
000-53619
10-K
10.18
12/31/04
000-53619
10-K
10.19
12/31/04
000-53619
10-K
10.20
12/31/10
000-53619
10-Q
10.21
9/30/11
000-53619
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
Second Addendum to The Employment Agreement
Between Vertex Energy, Inc. and Greg Wallace dated
June 15, 2012***
Employment Agreement with John Strickland - July
2012**
Credit Agreement between Vertex Energy, Inc. and
Bank of America, N.A. dated August 31, 2012
$10,000,000 Revolving Note by Vertex Energy, Inc. in
favor of Bank of America, N.A. dated August 31, 2012
$8,500,000 Term Note by Vertex Energy, Inc. in favor
of Bank of America, N.A. dated August 31, 2012
Security Agreement with Bank of America, N.A. dated
August 31, 2012
Corporate Guaranty in favor of Bank of America, N.A.
dated August 31, 2012
First Amendment to Credit Agreement between Vertex
Energy, Inc. and Bank of America, N.A. dated August
31, 2012
Non-Competition and Non-Solicitation Agreement by
Vertex Holdings, L.P., B & S Cowart Family L.P.,
Benjamin P. Cowart, Chris Carlson and Greg Wallace
in favor of Vertex Energy, Inc., dated August 31,
2012***
Second Addendum to Employment Agreement with
Benjamin P. Cowart, dated August 31, 2012***
First Addendum to Amended and Restated
Employment Agreement with Chris Carlson, dated
August 31, 2012***
2004 Stock Option Plan - World Waste Technologies,
Inc.***
Form of Stock Option Agreement, pursuant to 2004
Stock Option Plan***
10-Q
10.11
9/30/12
000-53619
10-Q
10.12
9/30/12
000-53619
8-K
10.1
9/12/12
000-53619
8-K
10.2
9/12/12
000-53619
8-K
10.3
9/12/12
000-53619
8-K
10.4
9/12/12
000-53619
8-K
10.5
9/12/12
000-53619
10-Q
10.18
9/30/12
000-53619
10-Q
10.19
9/30/12
000-53619
10-Q
10.20
9/30/12
000-53619
10-Q
10.21
9/30/12
000-53619
10-KSB 10.3
12/31/04
001-11476
10-KSB 10.4
12/31/04
001-11476
2007 Stock Plan - World Waste Technologies, Inc.***
8-K
10.2
5/21/07
001-11476
Form of Stock Option Agreement, pursuant to 2007
Stock Option Plan***
8-K
10.3
5/21/07
001-11476
Vertex Energy, Inc., 2008 Stock Incentive Plan***
8-K/A
4.1
6/26/09
000-53619
2008 Stock Incentive Plan - Form of Stock Option
Agreement***
X
10.28
Vertex Energy, Inc., 2009 Stock Incentive Plan***
8-K
4.1
7/31/09
000-53619
48
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
8-K/A
14.1
2/13/13
001-11476
8-K/A
99.2
2/13/13
001-11476
10.29
10.30
14.1
21.1
23.1
31.1
31.2
32.1
32.2
99.1
99.2
2009 Stock Incentive Plan - Form of Stock Option
Agreement***
Waiver and Second Amendment to Credit Agreement
with Bank of America, N.A. (January 2013)
Code of Ethical Business Conduct and Whistleblower
Protection Policy
Subsidiaries
Consent of LBB & Associates Ltd., LLP
Certification of Principal Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act
Certification of Principal Accounting Officer pursuant to
Section 302 of the Sarbanes-Oxley Act
Certification of Principal Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act**
Certification of Principal Accounting Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act**
Glossary of Selected Terms
Charters Of The Compensation Committee; Audit
Committee; Nominating And Corporate Governance
Committee; and Related Party Transaction Committee
101.INS++
XBRL Instance Document
101.SCH++
XBRL Taxonomy Extension Schema Document
101.CAL++
XBRL Taxonomy Extension Calculation Linkbase
Document
101.DEF++
XBRL Taxonomy Extension Definition Linkbase
Document
101.LAB++
XBRL Taxonomy Extension Label Linkbase Document
101.PRE++
XBRL Taxonomy Extension Presentation Linkbase
Document
* Filed herewith.
** Furnished herewith.
*** Indicates management contract or compensatory plan or arrangement.
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
+ Certain portions of these documents as (which portions have been replaced by "X's") have been omitted in connection with a request for
Confidential Treatment. This entire exhibit including the omitted confidential information has been filed separately with the Commission.
++XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for
purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
49
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Exhibit 10.27
To Whom It May Concern:
VERTEX ENERGY, INC.
STOCK OPTION AGREEMENT
Date: _____________to be effective __________
VERTEX ENERGY, INC. (the “Company”), for value received, hereby agrees to issue common stock purchase options entitling _____________
(“Holder” or the “Option Holder”) to purchase an aggregate of _____________ shares of the Company’s common stock (“Common
Stock”). Such option is evidenced by option certificates in the form attached hereto as Schedule 1a, Schedule 1b, Schedule 1c and Schedule
1d (such instrument being hereinafter referred to as an “Option,” and such Option and all instruments hereafter issued in replacement,
substitution, combination or subdivision thereof being hereinafter collectively referred to as the “Option”). The Option is issued in consideration for
services rendered and to be rendered to the Company and evidences the grant of the Option to the Holder by the Board of Directors of the
Company on _______________ (the “Grant Date”). The number of shares of Common Stock purchasable upon exercise of the Option is subject
to adjustment as provided in Section 5 below. The Option will be exercisable by the Option Holder (as defined below) as to all or any lesser
number of shares of Common Stock covered thereby, at an initial purchase price of US $______ per share (the “Purchase Price”), subject to
adjustment as provided in Section 5 below, which shall vest to the Holder as provided in Section 3(a) below, for the exercise period defined in
Section 3(b) below.
1. Representations and Warranties.
The Company represents and warrants to the Option Holder as follows:
(a)
(b)
Corporate and Other Action. The Company has all requisite power and authority (corporate and other), and has taken all
necessary corporate action, to authorize, execute, deliver and perform this Stock Option Agreement (the “Option Agreement”), to
execute, issue, sell and deliver the Option and a certificate or certificates evidencing the Option, to authorize and reserve for issue
and, upon payment from time to time of the Purchase Price, to issue, sell and deliver, the shares of the Common Stock issuable
upon exercise of the Option (“Shares”), and to perform all of its obligations under this Option Agreement and the Option. The
Shares, when issued in accordance with this Option Agreement, will be duly authorized and validly issued and outstanding, fully
paid and nonassessable and free of all liens, claims, encumbrances and preemptive rights. This Option Agreement and, when
issued, each Option issued pursuant hereto, has been or will be duly executed and delivered by the Company and is or will be a
legal, valid and binding agreement of the Company, enforceable in accordance with its terms. No authorization, approval,
consent or other order of any governmental entity, regulatory authority or other third party is required for such authorization,
execution, delivery, performance, issue or sale.
No Violation. The execution and delivery of this Option Agreement, the consummation of the transactions herein contemplated
and the compliance with the terms and provisions of this Option Agreement and of the Option will not conflict with, or result in a
breach of, or constitute a default or an event permitting acceleration under, any statute, the Articles of Incorporation or Bylaws of
the Company or any indenture, mortgage, deed of trust, note, bank loan, credit agreement, franchise, license, lease, permit, or
any other agreement, understanding, instrument, judgment, decree, order, statute, rule or regulation to which the Company is a
party or by which it is bound.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
2. Transfer.
(a)
Transferability of Option. The Option Holder agrees that this Option is not transferable by Holder.
(b)
Registration of Shares. The Option Holder agrees not to make any sale or other disposition of the Shares except pursuant to a
registration statement which has become effective under the Securities Act of 1933, as amended (the “Act”), setting forth the
terms of such offering, the underwriting discount and commissions and any other pertinent data with respect thereto, unless the
Option Holder has provided the Company with an acceptable opinion of counsel acceptable to the Company that such registration
is not required. Certificates representing the Shares, which are not registered as provided in this Section 2, shall bear an
appropriate legend and be subject to a “stop-transfer” order.
3. Vesting of Option, Exercise of Option, Partial Exercise, Notice.
(a)
Vesting Period. Options to purchase ______ shares shall vest upon the expiration of each year that elapses from the Grant
Date (with options to purchase the first ______ shares vesting on ______________), until Holder has vested the entire Option,
provided that the entire Option shall vest to Holder immediately upon the occurrence of a "Change in Control" as defined under
the Company’s 2008 Stock Incentive Plan (the “Plan”), which includes:
(1)
(2)
(3)
the adoption of a plan of merger or consolidation of the Company with any other corporation or association as a result
of which the holders of the voting capital stock of the Company as a group would receive less than 50% of the voting
capital stock of the surviving or resulting corporation;
the approval by the Board of Directors of the Company of an agreement providing for the sale or transfer of
substantially all the assets of the Company; or
in the absence of a prior expression of approval by the Board of Directors, the acquisition of more than 20% of the
Company's voting capital stock by any person within the meaning of Rule 13d-3 under the Act (other than the
Company or a person that directly or indirectly controls, is controlled by, or is under common control with, the
Company);
Provided that Holder shall cease to continue vesting the Option as provided above, upon the termination of Holder’s employment
with the Company (or in the case of a Director of the Company, the date such Director ceases to serve as a Director of the
Company), as determined by the Board of Directors of the Company in its sole discretion.
(b)
Exercise Period. This Option shall expire and all rights hereunder shall be extinguished upon the earlier of:
(i) Ten (10) years from the Grant Date; or
(ii)
Three (3) Months from the date Holder’s employment with the Company ceases (or in the case of a Director of the
Company, the date such Director ceases to serve as a Director of the Company), as determined by the Board of Directors
of the Company in its sole discretion, unless such employment shall have terminated:
(1) as a result of the Disability of Holder, as defined in the Plan, in which event such exercise period shall expire on the
date twelve (12) months following such termination of service by the Company, not to exceed the time period specified in
Section 3(b)(i) above; or
(2) as a result of the death of Holder (other than as a result of disability), in which event such exercise period shall expire
on the date twelve (12) months after the date of Holder’s death, not to exceed the time period specified in Section 3(b)(i)
above.
2
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
(c)
(d)
Exercise in Full. Subject to Section 3(a) and 3(b), the Option may be exercised in full by the Option Holder by surrender of the
Option, with the Form of Subscription attached hereto as Schedule 2 executed by such Option Holder, to the Company,
accompanied by payment as determined by 3(e) below, in the amount obtained by multiplying the number of Shares represented
by the respective Option by the Purchase Price per share (after giving effect to any adjustments as provided in Section 5 below).
Partial Exercise. Subject to Section 3(a) and 3(b), each Option may be exercised in part by the Option Holder by surrender of
the Option, with the Form of Subscription attached hereto as Schedule 2 at the end thereof duly executed by such Option Holder,
in the manner and at the place provided in Section 3(c) above, accompanied by payment as determined by 3(e) below, in amount
obtained by multiplying the number of Shares designated by the Option Holder in the Form of Subscription attached hereto as
Schedule 2 to the Option by the Purchase Price per share (after giving effect to any adjustments as provided in Section 5
below). Upon any such partial exercise, the Company at its expense will forthwith issue and deliver to or upon the order of the
Option Holder a new Option of like tenor, in the name of the Option Holder, calling in the aggregate for the purchase of the
number of Shares equal to the number of such Shares called for on the face of the respective Option (after giving effect to any
adjustment herein as provided in Section 5 below) minus the number of such Shares designated by the Option Holder in the
aforementioned form of subscription.
(e)
Payment of Purchase Price. The Purchase Price may be made by any of the following or a combination thereof, at the election
of the Option Holder:
(i) In cash, by wire transfer, by certified or cashier’s check, or by money order; or
(ii) By delivery to the Company of an exercise notice that requests the Company to issue to the Option Holder the
full number of shares as to which the Option is then exercisable, less the number of shares that have an aggregate Fair
Market Value, as determined by the Board in its sole discretion at the time of exercise, equal to the aggregate purchase
price of the shares to which such exercise relates. (This method of exercise allows the Option Holder to use a portion of
the shares issuable at the time of exercise as payment for the shares to which the Option relates and is often referred to
as a "cashless exercise." For example, if the Option Holder elects to exercise 1,000 shares at an exercise price of $0.25
and the current Fair Market Value of the shares on the date of exercise is $1.00, the Option Holder can use 250 of the
1,000 shares at $1.00 per share to pay for the exercise of the entire Option (250 x $1.00 = $250.00) and receive only the
remaining 750 shares).
For purposes of this section, "Fair Market Value” shall be defined as the average closing price of the Common Stock (if actual
sales price information on any trading day is not available, the closing bid price shall be used) for the five trading days prior to the
date of exercise of this Option (the “Average Closing Bid Price”), as reported by the National Association of Securities Dealers
Automated Quotation System (“NASDAQ”), or if the Common Stock is not traded on NASDAQ, the Average Closing Bid Price in
the over-the-counter market; provided, however, that if the Common Stock is listed on a stock exchange, the Fair Market Value
shall be the Average Closing Bid Price on such exchange; and, provided further, that if the Common Stock is not quoted or listed
by any organization, the fair value of the Common Stock, as determined by the Board of Directors of the Company, whose
determination shall be conclusive, shall be used). In no event shall the Fair Market Value of any share of Common Stock be less
than its par value.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
4. Delivery of Stock Certificates on Exercise.
Any exercise of the Option pursuant to Section 3 shall be deemed to have been effected immediately prior to the close of business on the
date on which the Option together with the Form of Subscription and the payment for the aggregate Purchase Price shall have been
received by the Company. At such time, the person or persons in whose name or names any certificate or certificates representing the
Shares or Other Securities (as defined below) shall be issuable upon such exercise shall be deemed to have become the holder or
holders of record of the Shares or Other Securities so purchased. As soon as practicable after the exercise of any Option in full or in part,
and in any event within Ten (10) business days thereafter, the Company at its expense (including the payment by it of any applicable
issue taxes) will cause to be issued in the name of, and delivered to the purchasing Option Holder, a certificate or certificates representing
the number of fully paid and nonassessable shares of Common Stock or Other Securities to which such Option Holder shall be entitled
upon such exercise, plus in lieu of any fractional share to which such Option Holder would otherwise be entitled, cash in an amount
determined pursuant to Section 6(e). The term “Other Securities” refers to any stock (other than Common Stock), other securities or
assets (including cash) of the Company or any other person (corporate or otherwise) which the Option Holder at any time shall be entitled
to receive, or shall have received, upon the exercise of the Option, in lieu of or in addition to Common Stock, or which at any time shall be
issuable or shall have been issued in exchange for or in replacement of Common Stock or Other Securities pursuant to Section 5 below or
otherwise.
5. Adjustment of Purchase Price and Number of Shares Purchasable.
The Purchase Price and the number of Shares are subject to adjustment from time to time as set forth in this Section 5.
(a)
(b)
(c)
In case the Company shall at any time after the date of this Option Agreement (i) declare a dividend on the Common Stock in
shares of its capital stock, (ii) subdivide the outstanding Common Stock, (iii) combine the outstanding Common Stock into a
smaller number of Common Stock, or (iv) issue any shares of its capital stock by reclassification of the Common Stock (including
any such reclassification in connection with a consolidation or merger in which the Company is the continuing corporation), then
in each case the Purchase Price, and the number and kind of Shares receivable upon exercise, in effect at the time of the record
date for such dividend or of the effective date of such subdivision, combination, or reclassification shall be proportionately
adjusted so that the holder of any Option exercised after such time shall be entitled to receive the aggregate number and kind of
Shares which, if such Option had been exercised immediately prior to such record date, he would have owned upon such
exercise and been entitled to receive by virtue of such dividend, subdivision, combination, or reclassification. Such adjustment
shall be made successively whenever any event listed above shall occur.
No adjustment in the Purchase Price shall be required if such adjustment is less than US $.01; provided, however, that any
adjustments which by reason of this subsection (b) are not required to be made shall be carried forward and taken into account in
any subsequent adjustment. All calculations under this Section 5 shall be made to the nearest cent or to the nearest one-
thousandth of a share, as the case may be.
Upon each adjustment of the Purchase Price as a result of the calculations made in subsection (a) of this Section 5, the Option
outstanding prior to the making of the adjustment in the Purchase Price shall thereafter evidence the right to purchase, at the
adjusted Purchase Price, that number of Shares (calculated to the nearest thousandth) obtained by (i) multiplying the number of
Shares purchasable upon exercise of the Option immediately prior to adjustment of the number of Shares by the Purchase Price
in effect prior to adjustment of the Purchase Price and (ii) dividing the product so obtained by the Purchase Price in effect
immediately after such adjustment of the Purchase Price.
4
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
6. Further Covenants of the Company.
(a)
Dilution or Impairments. The Company will not, by amendment of its certificate of incorporation or through any reorganization,
transfer of assets, consolidation, merger or dissolution, avoid or seek to avoid the observance or performance of any of the terms
of the Option or of this Option Agreement, but will at all times in good faith assist in the carrying out of all such terms and in the
taking of all such action as may be necessary or appropriate in order to protect the rights of the Option Holder against dilution or
other impairment. Without limiting the generality of the foregoing, the Company:
(i)
(ii)
shall at all times reserve and keep available, solely for issuance and delivery upon the exercise of the Option, all shares of
Common Stock (or Other Securities) from time to time issuable upon the exercise of the Option and shall take all
necessary actions to ensure that the par value per share, if any, of the Common Stock (or Other Securities) is at all times
equal to or less than the then effective Purchase Price per share; and
will take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully
paid and nonassessable shares of Common Stock or Other Securities upon the exercise of the Option from time to time
outstanding.
Title to Stock. All Shares delivered upon the exercise of the Option shall be validly issued, fully paid and nonassessable; each
Option Holder shall, upon such delivery, receive good and marketable title to the Shares, free and clear of all voting and other
trust arrangements, liens, encumbrances, equities and claims whatsoever; and the Company shall have paid all taxes, if any, in
respect of the issuance thereof.
Replacement of Option. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of any Option and, in the case of any such loss, theft or destruction, upon delivery of an indemnity agreement
reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, upon surrender and
cancellation of such Option, the Company, at the expense of the Option Holder, will execute and deliver, in lieu thereof, a new
Option of like tenor.
(b)
(c)
(d)
Fractional Shares. No fractional Shares are to be issued upon the exercise of any Option, but the Company shall round any
fraction of a share to the nearest whole Share.
7. Holders of Shares.
(a)
(b)
The Option is issued upon the following terms, to all of which each Option Holder by the taking thereof consents and agrees: any
person who shall become a holder or owner of Shares shall take such shares subject to the provisions of Section 2(b) hereof;
each prior taker or owner waives and renounces all of his equities or rights in such Option in favor of each such permitted bona
fide purchaser, and each such permitted bona fide purchaser shall acquire absolute title thereto and to all rights presented
thereby.
The Option Holder shall notify the Company if such Option Holder sells or otherwise transfers any shares of Common Stock of the
Company acquired upon exercise of the Option within two (2) years of the Grant Date of such Option or within one (1) year of the
date such shares were acquired upon exercise of this Option.
8. Miscellaneous.
All notices, certificates and other communications from or at the request of the Company to any Option Holder shall be mailed by first
class, registered or certified mail, postage prepaid, to such address as may have been furnished to the Company in writing by such
Option Holder, or, until an address is so furnished, to the address of the last holder of such Option who has so furnished an address to the
Company, except as otherwise provided herein. This Option Agreement and any of the terms hereof may be changed, waived,
discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver,
discharge or termination is sought. This Option Agreement shall be construed and enforced in accordance with and governed by the laws
of the State of Texas. The headings in this Option Agreement are for purposes of reference only and shall not limit or otherwise affect
any of the terms hereof. This Option Agreement, together with the forms of instruments annexed hereto as schedules, constitutes the full
and complete agreement of the parties hereto with respect to the subject matter hereof. For purposes of this Option Agreement, a faxed
signature shall constitute an original signature. A photocopy or faxed copy of this Agreement shall be effective as an original for all
purposes.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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IN WITNESS WHEREOF, the Company has caused this Option Agreement to be executed on this _____th day of ___________, to be effective
as of _____________, the Grant Date, by its proper corporate officers, thereunto duly authorized.
VERTEX ENERGY, INC.
By______________________________
Benjamin P. Cowart, Chief Executive Officer
HOLDER:__________________
____________________________
____________________________
6
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
OPTION
SCHEDULE 1a
THIS OPTION AND THE SECURITIES TO BE ISSUED UPON ITS EXERCISE HAVE NOT BEEN REGISTERED UNDER: (A) THE SECURITIES
ACT OF 1933, AS AMENDED (THE “ACT”), IN RELIANCE UPON THE EXEMPTIONS FROM REGISTRATION PROVIDED IN SECTIONS 3 AND
4 OF SUCH ACT AND REGULATION S PROMULGATED THEREUNDER; OR (B) ANY STATE SECURITIES LAWS IN RELIANCE UPON
APPLICABLE EXEMPTIONS THEREUNDER. THIS OPTION MAY NOT BE EXERCISED BY OR ON BEHALF OF ANY U.S. PERSON UNLESS
REGISTERED UNDER THE ACT OR AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE. THIS OPTION MUST BE ACQUIRED
FOR INVESTMENT ONLY FOR THE ACCOUNT OF THE INVESTOR, AND NEITHER THE OPTION NOR THE UNDERLYING STOCK MAY BE
TRANSFERRED EXCEPT IN COMPLIANCE WITH THE PROVISIONS OF REGULATION S AND OTHER LAWS OR PURSUANT TO
REGISTRATION UNDER THE ACT OR AN AVAILABLE EXEMPTION FROM REGISTRATION. HEDGING TRANSACTIONS INVOLVING THIS
OPTION OR THE SECURITIES TO BE ISSUED UPON ITS EXERCISE MAY NOT BE CONDUCTED UNLESS IN COMPLIANCE WITH THE
ACT.
VERTEX ENERGY, INC.
To Purchase ______ Shares
of Common Stock
This certifies that, for value received, the hereafter named registered owner is entitled, subject to the terms and conditions of this Option, until the
expiration date, to purchase the number of shares (the “Shares”) set forth above of the common stock (“Common Stock”), of VERTEX ENERGY,
INC. (the “Company”) from the Company at the purchase price per share hereafter set forth below, on delivery of this Option to the Company with
the exercise form duly executed and payment of the purchase price (in cash, via certified or bank cashier’s check payable to the order of the
Company, or in shares of the Company’s common stock in the event of a cashless exercise) for each Share purchased. This Option is subject to
the terms of the Option Agreement between the parties thereto dated as of _______________, the terms of which are hereby incorporated herein.
Reference is hereby made to such Option Agreement for a further statement of the rights of the holder of this Option.
Registered Owner: _____________
Effective Date: _______________
Purchase Price
Per Share: US $______
Vesting Date: Subject to Section 3(a) of the Option Agreement, ____________, 5:00 p.m. Central Standard Time
Expiration Date: Subject to Section 3(b) of the Option Agreement, 5:00 p.m. Central Standard Time.
WITNESS the signature of the Company’s authorized officer:
VERTEX ENERGY, INC.
By________________________________________
Benjamin P. Cowart, Chief Executive Officer
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
OPTION
SCHEDULE 1b
THIS OPTION AND THE SECURITIES TO BE ISSUED UPON ITS EXERCISE HAVE NOT BEEN REGISTERED UNDER: (A) THE SECURITIES
ACT OF 1933, AS AMENDED (THE “ACT”), IN RELIANCE UPON THE EXEMPTIONS FROM REGISTRATION PROVIDED IN SECTIONS 3 AND
4 OF SUCH ACT AND REGULATION S PROMULGATED THEREUNDER; OR (B) ANY STATE SECURITIES LAWS IN RELIANCE UPON
APPLICABLE EXEMPTIONS THEREUNDER. THIS OPTION MAY NOT BE EXERCISED BY OR ON BEHALF OF ANY U.S. PERSON UNLESS
REGISTERED UNDER THE ACT OR AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE. THIS OPTION MUST BE ACQUIRED
FOR INVESTMENT ONLY FOR THE ACCOUNT OF THE INVESTOR, AND NEITHER THE OPTION NOR THE UNDERLYING STOCK MAY BE
TRANSFERRED EXCEPT IN COMPLIANCE WITH THE PROVISIONS OF REGULATION S AND OTHER LAWS OR PURSUANT TO
REGISTRATION UNDER THE ACT OR AN AVAILABLE EXEMPTION FROM REGISTRATION. HEDGING TRANSACTIONS INVOLVING THIS
OPTION OR THE SECURITIES TO BE ISSUED UPON ITS EXERCISE MAY NOT BE CONDUCTED UNLESS IN COMPLIANCE WITH THE
ACT.
VERTEX ENERGY, INC.
To Purchase ______ Shares
of Common Stock
This certifies that, for value received, the hereafter named registered owner is entitled, subject to the terms and conditions of this Option, until the
expiration date, to purchase the number of shares (the “Shares”) set forth above of the common stock (“Common Stock”), of VERTEX ENERGY,
INC. (the “Company”) from the Company at the purchase price per share hereafter set forth below, on delivery of this Option to the Company with
the exercise form duly executed and payment of the purchase price (in cash, via certified or bank cashier’s check payable to the order of the
Company, or in shares of the Company’s common stock in the event of a cashless exercise) for each Share purchased. This Option is subject to
the terms of the Option Agreement between the parties thereto dated as of ______________, the terms of which are hereby incorporated herein.
Reference is hereby made to such Option Agreement for a further statement of the rights of the holder of this Option.
Registered Owner: _____________
Effective Date: _______________
Purchase Price
Per Share: US $______
Vesting Date: Subject to Section 3(a) of the Option Agreement, ____________, 5:00 p.m. Central Standard Time
Expiration Date: Subject to Section 3(b) of the Option Agreement, 5:00 p.m. Central Standard Time.
WITNESS the signature of the Company’s authorized officer:
VERTEX ENERGY, INC.
By________________________________________
Benjamin P. Cowart, Chief Executive Officer
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
OPTION
SCHEDULE 1c
THIS OPTION AND THE SECURITIES TO BE ISSUED UPON ITS EXERCISE HAVE NOT BEEN REGISTERED UNDER: (A) THE SECURITIES
ACT OF 1933, AS AMENDED (THE “ACT”), IN RELIANCE UPON THE EXEMPTIONS FROM REGISTRATION PROVIDED IN SECTIONS 3 AND
4 OF SUCH ACT AND REGULATION S PROMULGATED THEREUNDER; OR (B) ANY STATE SECURITIES LAWS IN RELIANCE UPON
APPLICABLE EXEMPTIONS THEREUNDER. THIS OPTION MAY NOT BE EXERCISED BY OR ON BEHALF OF ANY U.S. PERSON UNLESS
REGISTERED UNDER THE ACT OR AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE. THIS OPTION MUST BE ACQUIRED
FOR INVESTMENT ONLY FOR THE ACCOUNT OF THE INVESTOR, AND NEITHER THE OPTION NOR THE UNDERLYING STOCK MAY BE
TRANSFERRED EXCEPT IN COMPLIANCE WITH THE PROVISIONS OF REGULATION S AND OTHER LAWS OR PURSUANT TO
REGISTRATION UNDER THE ACT OR AN AVAILABLE EXEMPTION FROM REGISTRATION. HEDGING TRANSACTIONS INVOLVING THIS
OPTION OR THE SECURITIES TO BE ISSUED UPON ITS EXERCISE MAY NOT BE CONDUCTED UNLESS IN COMPLIANCE WITH THE
ACT.
VERTEX ENERGY, INC.
To Purchase ______ Shares
of Common Stock
This certifies that, for value received, the hereafter named registered owner is entitled, subject to the terms and conditions of this Option, until the
expiration date, to purchase the number of shares (the “Shares”) set forth above of the common stock (“Common Stock”), of VERTEX ENERGY,
INC. (the “Company”) from the Company at the purchase price per share hereafter set forth below, on delivery of this Option to the Company with
the exercise form duly executed and payment of the purchase price (in cash, via certified or bank cashier’s check payable to the order of the
Company, or in shares of the Company’s common stock in the event of a cashless exercise) for each Share purchased. This Option is subject to
the terms of the Option Agreement between the parties thereto dated as of ____________________, the terms of which are hereby incorporated
herein. Reference is hereby made to such Option Agreement for a further statement of the rights of the holder of this Option.
Registered Owner: _____________
Effective Date: _______________
Purchase Price
Per Share: US $______
Vesting Date: Subject to Section 3(a) of the Option Agreement, ____________, 5:00 p.m. Central Standard Time
Expiration Date: Subject to Section 3(b) of the Option Agreement, 5:00 p.m. Central Standard Time.
WITNESS the signature of the Company’s authorized officer:
VERTEX ENERGY, INC.
By________________________________________
Benjamin P. Cowart, Chief Executive Officer
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
OPTION
SCHEDULE 1d
THIS OPTION AND THE SECURITIES TO BE ISSUED UPON ITS EXERCISE HAVE NOT BEEN REGISTERED UNDER: (A) THE SECURITIES
ACT OF 1933, AS AMENDED (THE “ACT”), IN RELIANCE UPON THE EXEMPTIONS FROM REGISTRATION PROVIDED IN SECTIONS 3 AND
4 OF SUCH ACT AND REGULATION S PROMULGATED THEREUNDER; OR (B) ANY STATE SECURITIES LAWS IN RELIANCE UPON
APPLICABLE EXEMPTIONS THEREUNDER. THIS OPTION MAY NOT BE EXERCISED BY OR ON BEHALF OF ANY U.S. PERSON UNLESS
REGISTERED UNDER THE ACT OR AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE. THIS OPTION MUST BE ACQUIRED
FOR INVESTMENT ONLY FOR THE ACCOUNT OF THE INVESTOR, AND NEITHER THE OPTION NOR THE UNDERLYING STOCK MAY BE
TRANSFERRED EXCEPT IN COMPLIANCE WITH THE PROVISIONS OF REGULATION S AND OTHER LAWS OR PURSUANT TO
REGISTRATION UNDER THE ACT OR AN AVAILABLE EXEMPTION FROM REGISTRATION. HEDGING TRANSACTIONS INVOLVING THIS
OPTION OR THE SECURITIES TO BE ISSUED UPON ITS EXERCISE MAY NOT BE CONDUCTED UNLESS IN COMPLIANCE WITH THE
ACT.
VERTEX ENERGY, INC.
To Purchase ______ Shares
of Common Stock
This certifies that, for value received, the hereafter named registered owner is entitled, subject to the terms and conditions of this Option, until the
expiration date, to purchase the number of shares (the “Shares”) set forth above of the common stock (“Common Stock”), of VERTEX ENERGY,
INC. (the “Company”) from the Company at the purchase price per share hereafter set forth below, on delivery of this Option to the Company with
the exercise form duly executed and payment of the purchase price (in cash, via certified or bank cashier’s check payable to the order of the
Company, or in shares of the Company’s common stock in the event of a cashless exercise)for each Share purchased. This Option is subject to
the terms of the Option Agreement between the parties thereto dated as of _______________, the terms of which are hereby incorporated herein.
Reference is hereby made to such Option Agreement for a further statement of the rights of the holder of this Option.
Registered Owner: _____________
Effective Date: _______________
Purchase Price
Per Share: US $______
Vesting Date: Subject to Section 3(a) of the Option Agreement, ____________, 5:00 p.m. Central Standard Time
Expiration Date: Subject to Section 3(b) of the Option Agreement, 5:00 p.m. Central Standard Time.
WITNESS the signature of the Company’s authorized officer:
VERTEX ENERGY, INC.
By________________________________________
Benjamin P. Cowart, Chief Executive Officer
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
To VERTEX ENERGY, INC.:
FORM OF SUBSCRIPTION
(To be signed only upon exercise of Option)
thereunder,_______* shares of Common Stock of VERTEX ENERGY,
The undersigned, the holder of the enclosed Option, hereby irrevocably elects to exercise the purchase right represented by such Option for, and
to purchase
INC. and herewith makes payment of US
$_______________(or elects to pay for the exercise in shares of common stock pursuant to Section 3(e)(ii) of the Stock Option Agreement as
evidenced by the calculation below by checking this box ❑), and requests that the certificate or certificates for such shares be issued in the name
of and delivered to the undersigned.
SCHEDULE 2
Dated:______________
____________________________________________
(Signature must conform in all respects to name of holder
as specified on the face of the enclosed Option)
____________________________________________
(Printed Name)
____________________________________________
(Address)
(*) Insert here the number of shares called for on the face of the Option or, in the case of a partial exercise, the portion thereof as to which
the Option is being exercised, in either case without making any adjustment for additional Common Stock or any other stock or other securities or
property which, pursuant to the adjustment provisions of the Option Agreement pursuant to which the Option was granted, may be delivered upon
exercise.
Calculation pursuant to Section 3(e)(ii) of the Stock Option Agreement
________________ = Total Shares Exercised
________________ = Purchase Price (as defined and adjusted in the Stock Option Agreement)
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
________________ = Fair Market Value - the average closing price of the Common Stock (if actual sales price information on any trading day is not available, the closing bid price shall be used) for the five trading days prior to the date of exercise of this Warrant (the “Average Closing Bid Price”), as reported by the National Association of Securities Dealers Automated
Quotation System (“NASDAQ”), or if the Common Stock is not traded on NASDAQ, the Average Closing Bid Price in the over-the-counter market; provided, however, that if the Common Stock is listed on a stock exchange, the Fair Market Value shall be the Average Closing Bid Price on such exchange; and, provided further, that if the Common Stock is not quoted or listed
by any organization, the fair value of the Common Stock, as determined by the Board of Directors of the Company, whose determination shall be conclusive, shall be used). In no event shall the Fair Market Value of any share of Common Stock be less than its par value.
Total Shares Exercised x Purchase Price
_____________ = Shares to be Issued = Total Shares Exercised --------------------------------------------------
Fair Market Value
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Exhibit 10.29
To Whom It May Concern:
VERTEX ENERGY, INC.
STOCK OPTION AGREEMENT
Date: _____________to be effective __________
VERTEX ENERGY, INC. (the “Company”), for value received, hereby agrees to issue common stock purchase options entitling _____________
(“Holder” or the “Option Holder”) to purchase an aggregate of _____________ shares of the Company’s common stock (“Common
Stock”). Such option is evidenced by option certificates in the form attached hereto as Schedule 1a, Schedule 1b, Schedule 1c and Schedule
1d (such instrument being hereinafter referred to as an “Option,” and such Option and all instruments hereafter issued in replacement,
substitution, combination or subdivision thereof being hereinafter collectively referred to as the “Option”). The Option is issued in consideration for
services rendered and to be rendered to the Company and evidences the grant of the Option to the Holder by the Board of Directors of the
Company on _______________ (the “Grant Date”). The number of shares of Common Stock purchasable upon exercise of the Option is subject
to adjustment as provided in Section 5 below. The Option will be exercisable by the Option Holder (as defined below) as to all or any lesser
number of shares of Common Stock covered thereby, at an initial purchase price of US $______ per share (the “Purchase Price”), subject to
adjustment as provided in Section 5 below, which shall vest to the Holder as provided in Section 3(a) below, for the exercise period defined in
Section 3(b) below.
1. Representations and Warranties.
The Company represents and warrants to the Option Holder as follows:
(a)
(b)
Corporate and Other Action. The Company has all requisite power and authority (corporate and other), and has taken all
necessary corporate action, to authorize, execute, deliver and perform this Stock Option Agreement (the “Option Agreement”), to
execute, issue, sell and deliver the Option and a certificate or certificates evidencing the Option, to authorize and reserve for issue
and, upon payment from time to time of the Purchase Price, to issue, sell and deliver, the shares of the Common Stock issuable
upon exercise of the Option (“Shares”), and to perform all of its obligations under this Option Agreement and the Option. The
Shares, when issued in accordance with this Option Agreement, will be duly authorized and validly issued and outstanding, fully
paid and nonassessable and free of all liens, claims, encumbrances and preemptive rights. This Option Agreement and, when
issued, each Option issued pursuant hereto, has been or will be duly executed and delivered by the Company and is or will be a
legal, valid and binding agreement of the Company, enforceable in accordance with its terms. No authorization, approval,
consent or other order of any governmental entity, regulatory authority or other third party is required for such authorization,
execution, delivery, performance, issue or sale.
No Violation. The execution and delivery of this Option Agreement, the consummation of the transactions herein contemplated
and the compliance with the terms and provisions of this Option Agreement and of the Option will not conflict with, or result in a
breach of, or constitute a default or an event permitting acceleration under, any statute, the Articles of Incorporation or Bylaws of
the Company or any indenture, mortgage, deed of trust, note, bank loan, credit agreement, franchise, license, lease, permit, or
any other agreement, understanding, instrument, judgment, decree, order, statute, rule or regulation to which the Company is a
party or by which it is bound.
1
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
2. Transfer.
(a)
Transferability of Option. The Option Holder agrees that this Option is not transferable by Holder.
(b)
Registration of Shares. The Option Holder agrees not to make any sale or other disposition of the Shares except pursuant to a
registration statement which has become effective under the Securities Act of 1933, as amended (the “Act”), setting forth the
terms of such offering, the underwriting discount and commissions and any other pertinent data with respect thereto, unless the
Option Holder has provided the Company with an acceptable opinion of counsel acceptable to the Company that such registration
is not required. Certificates representing the Shares, which are not registered as provided in this Section 2, shall bear an
appropriate legend and be subject to a “stop-transfer” order.
3. Vesting of Option, Exercise of Option, Partial Exercise, Notice.
(a)
Vesting Period. Options to purchase ______ shares shall vest upon the expiration of each year that elapses from the Grant
Date (with options to purchase the first ______ shares vesting on ______________), until Holder has vested the entire Option,
provided that the entire Option shall vest to Holder immediately upon the occurrence of a "Change in Control" as defined under
the Company’s 2009 Stock Incentive Plan (the “Plan”), which includes:
(1)
(2)
(3)
the adoption of a plan of merger or consolidation of the Company with any other corporation or association as a result
of which the holders of the voting capital stock of the Company as a group would receive less than 50% of the voting
capital stock of the surviving or resulting corporation;
the approval by the Board of Directors of the Company of an agreement providing for the sale or transfer of
substantially all the assets of the Company; or
in the absence of a prior expression of approval by the Board of Directors, the acquisition of more than 20% of the
Company's voting capital stock by any person within the meaning of Rule 13d-3 under the Act (other than the
Company or a person that directly or indirectly controls, is controlled by, or is under common control with, the
Company);
Provided that Holder shall cease to continue vesting the Option as provided above, upon the later of (a) the termination of Holder’s
employment with the Company, or (b) in the case the Holder is a Director of the Company on the Grant Date, the date such
Director ceases to serve as a Director of the Company (each a “Termination Date”), as determined by the Board of Directors of
the Company in its sole discretion.
(b)
Exercise Period. This Option shall expire and all rights hereunder shall be extinguished upon the earlier of:
(i)
(ii)
Ten (10) years from the Grant Date; or
Three (3) Months from the date Holder’s employment with the Company ceases (or in the case of a Director of the
Company, the date such Director ceases to serve as a Director of the Company), as determined by the Board of Directors
of the Company in its sole discretion, unless such employment shall have terminated:
(1) as a result of the Disability of Holder, as defined in the Plan, in which event such exercise period shall expire on the
date twelve (12) months following such termination of service by the Company, not to exceed the time period specified in
Section 3(b)(i) above; or
(2) as a result of the death of Holder (other than as a result of disability), in which event such exercise period shall expire
on the date twelve (12) months after the date of Holder’s death, not to exceed the time period specified in Section 3(b)(i)
above.
2
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
(c)
(d)
Exercise in Full. Subject to Section 3(a) and 3(b), the Option may be exercised in full by the Option Holder by surrender of the
Option, with the Form of Subscription attached hereto as Schedule 2 executed by such Option Holder, to the Company,
accompanied by payment as determined by 3(e) below, in the amount obtained by multiplying the number of Shares represented
by the respective Option by the Purchase Price per share (after giving effect to any adjustments as provided in Section 5 below).
Partial Exercise. Subject to Section 3(a) and 3(b), each Option may be exercised in part by the Option Holder by surrender of
the Option, with the Form of Subscription attached hereto as Schedule 2 at the end thereof duly executed by such Option Holder,
in the manner and at the place provided in Section 3(c) above, accompanied by payment as determined by 3(e) below, in amount
obtained by multiplying the number of Shares designated by the Option Holder in the Form of Subscription attached hereto as
Schedule 2 to the Option by the Purchase Price per share (after giving effect to any adjustments as provided in Section 5
below). Upon any such partial exercise, the Company at its expense will forthwith issue and deliver to or upon the order of the
Option Holder a new Option of like tenor, in the name of the Option Holder, calling in the aggregate for the purchase of the
number of Shares equal to the number of such Shares called for on the face of the respective Option (after giving effect to any
adjustment herein as provided in Section 5 below) minus the number of such Shares designated by the Option Holder in the
aforementioned form of subscription.
(e)
Payment of Purchase Price. The Purchase Price may be made by any of the following or a combination thereof, at the election
of the Option Holder:
(i) In cash, by wire transfer, by certified or cashier’s check, or by money order; or
(ii) By delivery to the Company of an exercise notice that requests the Company to issue to the Option Holder the
full number of shares as to which the Option is then exercisable, less the number of shares that have an aggregate Fair
Market Value, as determined by the Board in its sole discretion at the time of exercise, equal to the aggregate purchase
price of the shares to which such exercise relates. (This method of exercise allows the Option Holder to use a portion of
the shares issuable at the time of exercise as payment for the shares to which the Option relates and is often referred to
as a "cashless exercise." For example, if the Option Holder elects to exercise 1,000 shares at an exercise price of $0.25
and the current Fair Market Value of the shares on the date of exercise is $1.00, the Option Holder can use 250 of the
1,000 shares at $1.00 per share to pay for the exercise of the entire Option (250 x $1.00 = $250.00) and receive only the
remaining 750 shares).
For purposes of this section, "Fair Market Value” shall be defined as the average closing price of the Common Stock (if actual
sales price information on any trading day is not available, the closing bid price shall be used) for the five trading days prior to the
date of exercise of this Option (the “Average Closing Bid Price”), as reported by the National Association of Securities Dealers
Automated Quotation System (“NASDAQ”), or if the Common Stock is not traded on NASDAQ, the Average Closing Bid Price in
the over-the-counter market; provided, however, that if the Common Stock is listed on a stock exchange, the Fair Market Value
shall be the Average Closing Bid Price on such exchange; and, provided further, that if the Common Stock is not quoted or listed
by any organization, the fair value of the Common Stock, as determined by the Board of Directors of the Company, whose
determination shall be conclusive, shall be used). In no event shall the Fair Market Value of any share of Common Stock be less
than its par value.
3
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
4. Delivery of Stock Certificates on Exercise.
Any exercise of the Option pursuant to Section 3 shall be deemed to have been effected immediately prior to the close of business on the
date on which the Option together with the Form of Subscription and the payment for the aggregate Purchase Price shall have been
received by the Company. At such time, the person or persons in whose name or names any certificate or certificates representing the
Shares or Other Securities (as defined below) shall be issuable upon such exercise shall be deemed to have become the holder or
holders of record of the Shares or Other Securities so purchased. As soon as practicable after the exercise of any Option in full or in part,
and in any event within Ten (10) Business Days thereafter, the Company at its expense (including the payment by it of any applicable
issue taxes) will cause to be issued in the name of, and delivered to the purchasing Option Holder, a certificate or certificates representing
the number of fully paid and nonassessable shares of Common Stock or Other Securities to which such Option Holder shall be entitled
upon such exercise, plus in lieu of any fractional share to which such Option Holder would otherwise be entitled, cash in an amount
determined pursuant to Section 6(e). The term “Other Securities” refers to any stock (other than Common Stock), other securities or
assets (including cash) of the Company or any other person (corporate or otherwise) which the Option Holder at any time shall be entitled
to receive, or shall have received, upon the exercise of the Option, in lieu of or in addition to Common Stock, or which at any time shall be
issuable or shall have been issued in exchange for or in replacement of Common Stock or Other Securities pursuant to Section 5 below or
otherwise. “Business Day” means a day other than (i) a Saturday, (ii) a Sunday or (iii) a day on which commercial banks in the City of
Houston, Texas are authorized or required to be closed for business.
5. Adjustment of Purchase Price and Number of Shares Purchasable.
The Purchase Price and the number of Shares are subject to adjustment from time to time as set forth in this Section 5.
(a)
(b)
(c)
In case the Company shall at any time after the date of this Option Agreement (i) declare a dividend on the Common Stock in
shares of its capital stock, (ii) subdivide the outstanding Common Stock, (iii) combine the outstanding Common Stock into a
smaller number of shares of Common Stock, or (iv) issue any shares of its capital stock by reclassification of the Common Stock
(including any such reclassification in connection with a consolidation or merger in which the Company is the continuing
corporation), then in each case the Purchase Price, and the number and kind of Shares receivable upon exercise, in effect at the
time of the record date for such dividend or of the effective date of such subdivision, combination, or reclassification shall be
proportionately adjusted so that the holder of any Option exercised after such time shall be entitled to receive the aggregate
number and kind of Shares which, if such Option had been exercised immediately prior to such record date, he would have owned
upon such exercise and been entitled to receive by virtue of such dividend, subdivision, combination, or reclassification. Such
adjustment shall be made successively whenever any event listed above shall occur.
No adjustment in the Purchase Price shall be required if such adjustment is less than US $0.01; provided, however, that any
adjustments which by reason of this subsection (b) are not required to be made shall be carried forward and taken into account in
any subsequent adjustment. All calculations under this Section 5 shall be made to the nearest cent or to the nearest one-
thousandth of a share, as the case may be.
Upon each adjustment of the Purchase Price as a result of the calculations made in subsection (a) of this Section 5, the Option
outstanding prior to the making of the adjustment in the Purchase Price shall thereafter evidence the right to purchase, at the
adjusted Purchase Price, that number of Shares (calculated to the nearest thousandth) obtained by (i) multiplying the number of
Shares purchasable upon exercise of the Option immediately prior to adjustment of the number of Shares by the Purchase Price
in effect prior to adjustment of the Purchase Price and (ii) dividing the product so obtained by the Purchase Price in effect
immediately after such adjustment of the Purchase Price.
4
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
6. Further Covenants of the Company.
(a)
Dilution or Impairments. The Company will not, by amendment of its certificate of incorporation or through any reorganization,
transfer of assets, consolidation, merger or dissolution, avoid or seek to avoid the observance or performance of any of the terms
of the Option or of this Option Agreement, but will at all times in good faith assist in the carrying out of all such terms and in the
taking of all such action as may be necessary or appropriate in order to protect the rights of the Option Holder against dilution or
other impairment. Without limiting the generality of the foregoing, the Company:
(i)
(ii)
shall at all times reserve and keep available, solely for issuance and delivery upon the exercise of the Option, all shares of
Common Stock (or Other Securities) from time to time issuable upon the exercise of the Option and shall take all
necessary actions to ensure that the par value per share, if any, of the Common Stock (or Other Securities) is at all times
equal to or less than the then effective Purchase Price per share; and
will take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully
paid and nonassessable shares of Common Stock or Other Securities upon the exercise of the Option from time to time
outstanding.
Title to Stock. All Shares delivered upon the exercise of the Option shall be validly issued, fully paid and nonassessable; each
Option Holder shall, upon such delivery, receive good and marketable title to the Shares, free and clear of all voting and other
trust arrangements, liens, encumbrances, equities and claims whatsoever; and the Company shall have paid all taxes, if any, in
respect of the issuance thereof.
Replacement of Option. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of any Option and, in the case of any such loss, theft or destruction, upon delivery of an indemnity agreement
reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, upon surrender and
cancellation of such Option, the Company, at the expense of the Option Holder, will execute and deliver, in lieu thereof, a new
Option of like tenor.
(b)
(c)
(d)
Fractional Shares. No fractional Shares are to be issued upon the exercise of any Option, but the Company shall round any
fraction of a share to the nearest whole Share.
7. Holders of Shares.
(a)
(b)
The Option is issued upon the following terms, to all of which each Option Holder by the taking thereof consents and agrees: any
person who shall become a holder or owner of Shares shall take such shares subject to the provisions of Section 2(b) hereof;
each prior taker or owner waives and renounces all of his equities or rights in such Option in favor of each such permitted bona
fide purchaser, and each such permitted bona fide purchaser shall acquire absolute title thereto and to all rights presented
thereby.
The Option Holder shall notify the Company if such Option Holder sells or otherwise transfers any shares of Common Stock of the
Company acquired upon exercise of the Option within two (2) years of the Grant Date of such Option or within one (1) year of the
date such shares were acquired upon exercise of this Option.
8. Miscellaneous.
All notices, certificates and other communications from or at the request of the Company to any Option Holder shall be mailed by first
class, registered or certified mail, postage prepaid, to such address as may have been furnished to the Company in writing by such
Option Holder, or, until an address is so furnished, to the address of the last holder of such Option who has so furnished an address to the
Company, except as otherwise provided herein. This Option Agreement and any of the terms hereof may be changed, waived,
discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver,
discharge or termination is sought. This Option Agreement shall be construed and enforced in accordance with and governed by the laws
of the State of Texas. The headings in this Option Agreement are for purposes of reference only and shall not limit or otherwise affect
any of the terms hereof. This Option Agreement, together with the forms of instruments annexed hereto as schedules, constitutes the full
and complete agreement of the parties hereto with respect to the subject matter hereof. For purposes of this Option Agreement, a faxed
signature shall constitute an original signature. A photocopy or faxed copy of this Agreement shall be effective as an original for all
purposes.
5
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
IN WITNESS WHEREOF, the Company has caused this Option Agreement to be executed on this _____th day of ___________, to be effective
as of _____________, the Grant Date, by its proper corporate officers, thereunto duly authorized.
VERTEX ENERGY, INC.
By________________________________________
Benjamin P. Cowart, Chief Executive Officer
HOLDER:___________________
____________________________
____________________________
6
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
OPTION
SCHEDULE 1a
THIS OPTION AND THE SECURITIES TO BE ISSUED UPON ITS EXERCISE HAVE NOT BEEN REGISTERED UNDER: (A) THE SECURITIES
ACT OF 1933, AS AMENDED (THE “ACT”), IN RELIANCE UPON THE EXEMPTIONS FROM REGISTRATION PROVIDED IN SECTIONS 3 AND
4 OF SUCH ACT AND REGULATION S PROMULGATED THEREUNDER; OR (B) ANY STATE SECURITIES LAWS IN RELIANCE UPON
APPLICABLE EXEMPTIONS THEREUNDER. THIS OPTION MAY NOT BE EXERCISED BY OR ON BEHALF OF ANY U.S. PERSON UNLESS
REGISTERED UNDER THE ACT OR AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE. THIS OPTION MUST BE ACQUIRED
FOR INVESTMENT ONLY FOR THE ACCOUNT OF THE INVESTOR, AND NEITHER THE OPTION NOR THE UNDERLYING STOCK MAY BE
TRANSFERRED EXCEPT IN COMPLIANCE WITH THE PROVISIONS OF REGULATION S AND OTHER LAWS OR PURSUANT TO
REGISTRATION UNDER THE ACT OR AN AVAILABLE EXEMPTION FROM REGISTRATION. HEDGING TRANSACTIONS INVOLVING THIS
OPTION OR THE SECURITIES TO BE ISSUED UPON ITS EXERCISE MAY NOT BE CONDUCTED UNLESS IN COMPLIANCE WITH THE
ACT.
VERTEX ENERGY, INC.
To Purchase ______ Shares
of Common Stock
This certifies that, for value received, the hereafter named registered owner is entitled, subject to the terms and conditions of this Option, until the
expiration date, to purchase the number of shares (the “Shares”) set forth above of the common stock (“Common Stock”), of VERTEX ENERGY,
INC. (the “Company”) from the Company at the purchase price per share hereafter set forth below, on delivery of this Option to the Company with
the exercise form duly executed and payment of the purchase price (in cash, via certified or bank cashier’s check payable to the order of the
Company, or in shares of the Company’s common stock in the event of a cashless exercise) for each Share purchased. This Option is subject to
the terms of the Option Agreement between the parties thereto dated as of _______________, the terms of which are hereby incorporated herein.
Reference is hereby made to such Option Agreement for a further statement of the rights of the holder of this Option.
Registered Owner: _____________
Effective Date: _______________
Purchase Price
Per Share: US $______
Vesting Date: Subject to Section 3(a) of the Option Agreement, ____________, 5:00 p.m. Central Standard Time
Expiration Date: Subject to Section 3(b) of the Option Agreement, 5:00 p.m. Central Standard Time.
WITNESS the signature of the Company’s authorized officer:
VERTEX ENERGY, INC.
By________________________________________
Benjamin P. Cowart, Chief Executive Officer
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
OPTION
SCHEDULE 1b
THIS OPTION AND THE SECURITIES TO BE ISSUED UPON ITS EXERCISE HAVE NOT BEEN REGISTERED UNDER: (A) THE SECURITIES
ACT OF 1933, AS AMENDED (THE “ACT”), IN RELIANCE UPON THE EXEMPTIONS FROM REGISTRATION PROVIDED IN SECTIONS 3 AND
4 OF SUCH ACT AND REGULATION S PROMULGATED THEREUNDER; OR (B) ANY STATE SECURITIES LAWS IN RELIANCE UPON
APPLICABLE EXEMPTIONS THEREUNDER. THIS OPTION MAY NOT BE EXERCISED BY OR ON BEHALF OF ANY U.S. PERSON UNLESS
REGISTERED UNDER THE ACT OR AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE. THIS OPTION MUST BE ACQUIRED
FOR INVESTMENT ONLY FOR THE ACCOUNT OF THE INVESTOR, AND NEITHER THE OPTION NOR THE UNDERLYING STOCK MAY BE
TRANSFERRED EXCEPT IN COMPLIANCE WITH THE PROVISIONS OF REGULATION S AND OTHER LAWS OR PURSUANT TO
REGISTRATION UNDER THE ACT OR AN AVAILABLE EXEMPTION FROM REGISTRATION. HEDGING TRANSACTIONS INVOLVING THIS
OPTION OR THE SECURITIES TO BE ISSUED UPON ITS EXERCISE MAY NOT BE CONDUCTED UNLESS IN COMPLIANCE WITH THE
ACT.
VERTEX ENERGY, INC.
To Purchase ______ Shares
of Common Stock
This certifies that, for value received, the hereafter named registered owner is entitled, subject to the terms and conditions of this Option, until the
expiration date, to purchase the number of shares (the “Shares”) set forth above of the common stock (“Common Stock”), of VERTEX ENERGY,
INC. (the “Company”) from the Company at the purchase price per share hereafter set forth below, on delivery of this Option to the Company with
the exercise form duly executed and payment of the purchase price (in cash, via certified or bank cashier’s check payable to the order of the
Company, or in shares of the Company’s common stock in the event of a cashless exercise) for each Share purchased. This Option is subject to
the terms of the Option Agreement between the parties thereto dated as of ______________, the terms of which are hereby incorporated herein.
Reference is hereby made to such Option Agreement for a further statement of the rights of the holder of this Option.
Registered Owner: _____________
Effective Date: ________________
Purchase Price
Per Share: US $______
Vesting Date: Subject to Section 3(a) of the Option Agreement, ______________, 5:00 p.m. Central Standard Time
Expiration Date: Subject to Section 3(b) of the Option Agreement, 5:00 p.m. Central Standard Time.
WITNESS the signature of the Company’s authorized officer:
VERTEX ENERGY, INC.
By________________________________________
Benjamin P. Cowart, Chief Executive Officer
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
OPTION
SCHEDULE 1c
THIS OPTION AND THE SECURITIES TO BE ISSUED UPON ITS EXERCISE HAVE NOT BEEN REGISTERED UNDER: (A) THE SECURITIES
ACT OF 1933, AS AMENDED (THE “ACT”), IN RELIANCE UPON THE EXEMPTIONS FROM REGISTRATION PROVIDED IN SECTIONS 3 AND
4 OF SUCH ACT AND REGULATION S PROMULGATED THEREUNDER; OR (B) ANY STATE SECURITIES LAWS IN RELIANCE UPON
APPLICABLE EXEMPTIONS THEREUNDER. THIS OPTION MAY NOT BE EXERCISED BY OR ON BEHALF OF ANY U.S. PERSON UNLESS
REGISTERED UNDER THE ACT OR AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE. THIS OPTION MUST BE ACQUIRED
FOR INVESTMENT ONLY FOR THE ACCOUNT OF THE INVESTOR, AND NEITHER THE OPTION NOR THE UNDERLYING STOCK MAY BE
TRANSFERRED EXCEPT IN COMPLIANCE WITH THE PROVISIONS OF REGULATION S AND OTHER LAWS OR PURSUANT TO
REGISTRATION UNDER THE ACT OR AN AVAILABLE EXEMPTION FROM REGISTRATION. HEDGING TRANSACTIONS INVOLVING THIS
OPTION OR THE SECURITIES TO BE ISSUED UPON ITS EXERCISE MAY NOT BE CONDUCTED UNLESS IN COMPLIANCE WITH THE
ACT.
VERTEX ENERGY, INC.
To Purchase ______ Shares
of Common Stock
This certifies that, for value received, the hereafter named registered owner is entitled, subject to the terms and conditions of this Option, until the
expiration date, to purchase the number of shares (the “Shares”) set forth above of the common stock (“Common Stock”), of VERTEX ENERGY,
INC. (the “Company”) from the Company at the purchase price per share hereafter set forth below, on delivery of this Option to the Company with
the exercise form duly executed and payment of the purchase price (in cash, via certified or bank cashier’s check payable to the order of the
Company, or in shares of the Company’s common stock in the event of a cashless exercise) for each Share purchased. This Option is subject to
the terms of the Option Agreement between the parties thereto dated as of ____________________, the terms of which are hereby incorporated
herein. Reference is hereby made to such Option Agreement for a further statement of the rights of the holder of this Option.
Registered Owner: _____________
Effective Date: _________________
Purchase Price
Per Share: US $______
Vesting Date: Subject to Section 3(a) of the Option Agreement, _____________, 5:00 p.m. Central Standard Time
Expiration Date: Subject to Section 3(b) of the Option Agreement, 5:00 p.m. Central Standard Time.
WITNESS the signature of the Company’s authorized officer:
VERTEX ENERGY, INC.
By________________________________________
Benjamin P. Cowart, Chief Executive Officer
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
OPTION
SCHEDULE 1d
THIS OPTION AND THE SECURITIES TO BE ISSUED UPON ITS EXERCISE HAVE NOT BEEN REGISTERED UNDER: (A) THE SECURITIES
ACT OF 1933, AS AMENDED (THE “ACT”), IN RELIANCE UPON THE EXEMPTIONS FROM REGISTRATION PROVIDED IN SECTIONS 3 AND
4 OF SUCH ACT AND REGULATION S PROMULGATED THEREUNDER; OR (B) ANY STATE SECURITIES LAWS IN RELIANCE UPON
APPLICABLE EXEMPTIONS THEREUNDER. THIS OPTION MAY NOT BE EXERCISED BY OR ON BEHALF OF ANY U.S. PERSON UNLESS
REGISTERED UNDER THE ACT OR AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE. THIS OPTION MUST BE ACQUIRED
FOR INVESTMENT ONLY FOR THE ACCOUNT OF THE INVESTOR, AND NEITHER THE OPTION NOR THE UNDERLYING STOCK MAY BE
TRANSFERRED EXCEPT IN COMPLIANCE WITH THE PROVISIONS OF REGULATION S AND OTHER LAWS OR PURSUANT TO
REGISTRATION UNDER THE ACT OR AN AVAILABLE EXEMPTION FROM REGISTRATION. HEDGING TRANSACTIONS INVOLVING THIS
OPTION OR THE SECURITIES TO BE ISSUED UPON ITS EXERCISE MAY NOT BE CONDUCTED UNLESS IN COMPLIANCE WITH THE
ACT.
VERTEX ENERGY, INC.
To Purchase ______ Shares
of Common Stock
This certifies that, for value received, the hereafter named registered owner is entitled, subject to the terms and conditions of this Option, until the
expiration date, to purchase the number of shares (the “Shares”) set forth above of the common stock (“Common Stock”), of VERTEX ENERGY,
INC. (the “Company”) from the Company at the purchase price per share hereafter set forth below, on delivery of this Option to the Company with
the exercise form duly executed and payment of the purchase price (in cash, via certified or bank cashier’s check payable to the order of the
Company, or in shares of the Company’s common stock in the event of a cashless exercise)for each Share purchased. This Option is subject to
the terms of the Option Agreement between the parties thereto dated as of _______________, the terms of which are hereby incorporated herein.
Reference is hereby made to such Option Agreement for a further statement of the rights of the holder of this Option.
Registered Owner: _____________
Effective Date: _______________
Purchase Price
Per Share: US $______
Vesting Date: Subject to Section 3(a) of the Option Agreement, _______________, 5:00 p.m. Central Standard Time
Expiration Date: Subject to Section 3(b) of the Option Agreement, 5:00 p.m. Central Standard Time.
WITNESS the signature of the Company’s authorized officer:
VERTEX ENERGY, INC.
By________________________________________
Benjamin P. Cowart, Chief Executive Officer
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
To VERTEX ENERGY, INC.:
FORM OF SUBSCRIPTION
(To be signed only upon exercise of Option)
thereunder,_______* shares of Common Stock of VERTEX ENERGY,
The undersigned, the holder of the enclosed Option, hereby irrevocably elects to exercise the purchase right represented by such Option for, and
to purchase
INC. and herewith makes payment of US
$_______________(or elects to pay for the exercise in shares of common stock pursuant to Section 3(e)(ii) of the Stock Option Agreement as
evidenced by the calculation below by checking this box ❑), and requests that the certificate or certificates for such shares be issued in the name
of and delivered to the undersigned.
SCHEDULE 2
Dated:______________
____________________________________________
(Signature must conform in all respects to name of holder
as specified on the face of the enclosed Option)
____________________________________________
(Printed Name)
____________________________________________
(Address)
(*) Insert here the number of shares called for on the face of the Option or, in the case of a partial exercise, the portion thereof as to which
the Option is being exercised, in either case without making any adjustment for additional Common Stock or any other stock or other securities or
property which, pursuant to the adjustment provisions of the Option Agreement pursuant to which the Option was granted, may be delivered upon
exercise.
Calculation pursuant to Section 3(e)(ii) of the Stock Option Agreement
________________ = Total Shares Exercised
________________ = Purchase Price (as defined and adjusted in the Stock Option Agreement)
________________ = Fair Market Value - the average closing price of the Common Stock (if actual sales price information on any trading day is not available, the closing bid price shall be used) for the five trading days prior to the date of exercise of this Warrant (the “Average Closing Bid Price”), as reported by the National Association of Securities Dealers Automated
Quotation System (“NASDAQ”), or if the Common Stock is not traded on NASDAQ, the Average Closing Bid Price in the over-the-counter market; provided, however, that if the Common Stock is listed on a stock exchange, the Fair Market Value shall be the Average Closing Bid Price on such exchange; and, provided further, that if the Common Stock is not quoted or listed
by any organization, the fair value of the Common Stock, as determined by the Board of Directors of the Company, whose determination shall be conclusive, shall be used). In no event shall the Fair Market Value of any share of Common Stock be less than its par value.
Total Shares Exercised x Purchase Price
_____________ = Shares to be Issued = Total Shares Exercised --------------------------------------------------
Fair Market Value
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Exhibit 10.30
WAIVER AND SECOND AMENDMENT TO CREDIT AGREEMENT
THIS WAIVER AND SECOND AMENDMENT TO CREDIT AGREEMENT (this “Amendment”) is entered into as of January 18, 2013
(the “Effective Date”), between VERTEX ENERGY, INC., a Nevada corporation (“B❑rr❑wer”), and BANK OF AMERICA, N.A. (“Lender”).
Capitalized terms used but not defined in this Amendment have the meanings given them in the Credit Agreement (defined below).
RECITALS
A. Borrower and Lender are party to that certain Credit Agreement dated as of August 31, 2012 (as amended by the First
Amendment to Credit Agreement dated as of October 10, 2012, and as further amended, restated, or supplemented from time to time, the
“Credit Agreement”).
B. Certain Defaults have occurred as a result of Borrower’s failure to comply with the minimum Tangible Net Worth covenant for
the fiscal quarters ending September 30, 2012, and December 31, 2012, as set forth in Section 10.3 of the Credit Agreement (collectively, the
“E☑isting Defaults”).
C. Borrower and Lender are party to that certain Post-Closing Letter Agreement dated as of August 31, 2012 (the
“P❑st-Cl❑sing Letter Agreement”).
D. Borrower has requested that Lender waive the Existing Defaults, extend certain deadlines in the Post-Closing Letter
Agreement, and amend the Credit Agreement in order to, among other things, remove the minimum Tangible Net Worth covenant and modify the
definition of “LIBOR” to include a daily floating LIBOR rate, and Lender is willing to do so subject to the terms and conditions of this Amendment.
NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are acknowledged, the undersigned
hereby agree as follows:
1. Amendments to Credit Agreement.
( a ) Section 1.1 (Definitions) of the Credit Agreement is amended to delete the defined terms “BBA LIBOR”,
“Business Day”, “LIBOR”, and “Loan Request” in their entirety and to replace them with the following:
“BBA LIBOR means the British Bankers Association LIBOR Rate (or any successor thereto approved by Lender if the
British Bankers Association is no longer making a LIBOR rate available).
Business Day means any day ❑ther than a Saturday, Sunday or other day on which commercial banks are authorized to
close under the Laws of, or are in fact closed in, the state where Lender’s Office is located.
LIBOR means a fluctuating rate of interest equal to the rate per annum (rounded upwards to the nearest 1/100 of one
percent) equal to BBA LIBOR, as published by Reuters (or other commercially available source providing quotations of
BBA LIBOR as selected by Lender from time to time) as determined for each banking day at approximately 11:00 a.m.,
London time, two Business Days prior to the date in question, for U.S. deposits (for delivery on the first day of such
interest period) with a one month term, as adjusted from time to time in Lender’s sole discretion for reserve requirements,
deposit insurance assessment rates and other regulatory costs. If such rate is not available at such time for any reason,
then the rate for that interest period will be determined by such alternate method as reasonably selected by Lender.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Loan Request means a request substantially in the form of Exhibit B, or in such other form as may be acceptable to
Lender.”
(b) Section 1.1 (Definitions) of the Credit Agreement is amended to delete the defined terms “Continue, Continuation,
and Continued”, “Convert, Conversion, and Converted”, “Conversion/Continuation Notice”, “Funding Loss”, “Interest Period”, “LIBOR
Reserve Percentage”, and “Type” in their entirety.
( c ) Section 2.3(a) (Loan Procedure) of the Credit Agreement is amended to delete the first sentence in its entirety and to
replace it with the following:
“(a) Subject to compliance with Section 5, Borrower may request a Loan under the Revolving Credit Facility or the
Term Loan by submitting a Loan Request to Lender. A Loan Request is irrevocable and binding on Borrower. Each Loan
Request must be received by Lender no later than 11:00 a.m. on the proposed Loan Date.”
(d) Section 2.4(g) (Prepayments) of the Credit Agreement is deleted in its entirety.
( e ) Section 3.2(a) (Revolving Credit Facility) of the Credit Agreement is deleted in its entirety and replaced with the
following:
“(a) Accrued interest on the Revolving Principal Amount is due and payable monthly in arrears on the last day of
each month and on the Revolving Credit Termination Date.”
(f) Section 3.3(a) (Term Loan) of the Credit Agreement is deleted in its entirety and replaced with the following:
“(a) Accrued interest on the Term Principal Amount is due and payable monthly in arrears on the last day of
each month and on the Term Loan Maturity Date.”
(g) Section 3.10 (Interest Periods, Conversions, and Continuations) of the Credit Agreement is deleted in its entirety and
replaced with the following:
“3.10 (Intentionally Omitted).”
( h ) Section 3.11 (Limitations on Types of Loans) of the Credit Agreement is deleted in its entirety and replaced with the
following:
“3.11 (Intentionally Omitted).”
(i) Section 3.12 (Increased Cost and Reduced Return) of the Credit Agreement is deleted in its entirety and replaced with
the following:
“3.12 (Intentionally Omitted).”
2
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
(j) Section 3.13 (Illegality) of the Credit Agreement is deleted in its entirety and replaced with the following:
“3.13 (Intentionally Omitted).”
(k) Section 3.14 (Treatment of Affected Loans) of the Credit Agreement is deleted in its entirety and replaced with the
following:
“3.14 (Intentionally Omitted).”
(l) Section 3.15 (Funding Loss) of the Credit Agreement is deleted in its entirety and replaced with the following:
“3.15 (Intentionally Omitted).”
(m) Section 10.3 (Minimum Tangible Net Worth) of the Credit Agreement is deleted in its entirety and replaced with the
following:
“10.3 (Intentionally Omitted).”
2. Waiver ❑f Existing Defaults. Subject to the terms and conditions set out in this Amendment, Lender hereby (a) waives
the Existing Defaults, and (b) agrees not to exercise any of the rights or remedies available to Lender under the Loan Documents solely as a
result of the noncompliance described in the immediately preceding clause (a). Except as set out in the preceding sentence, the foregoing waiver
does not constitute a waiver of any present or future violation of, or noncompliance with, any provision of any Loan Document or a waiver of
Lender’s right to insist upon strict compliance with each term, covenant, condition, and provision of the Loan Documents.
3. Post-Cl❑sing. Effective as of December 31, 2012, Borrower and Lender covenant and agree that the deadline specified in
Paragraph A.2. of the Post-Closing Letter Agreement with respect to the delivery of an extension to the CMT Lease is hereby extended to March
1, 2013.
4 . Conditi❑ns. This Amendment shall be effective as of the Effective Date once each of the following has been delivered to
Lender, in each case, in Proper Form:
(a) this Amendment executed by Borrower and Lender;
(b) Guarantors’ Consent and Agreement executed by Guarantors; and
(c) such other documents as Lender may reasonably request.
5. Representations and Warranties. Borrower represents and warrants to Lender that (a) it possesses all requisite power and
authority to execute, deliver and comply with the terms of this Amendment, (b) this Amendment has been duly authorized and approved by all
requisite corporate action on the part of Borrower, (c) no other consent of any Person (other than Lender) is required for this Amendment to be
effective, (d) the execution and delivery of this Amendment does not violate its organizational documents, (e) the representations and warranties
in each Loan Document to which it is a party are true and correct in all material respects on and as of the date of this Amendment as though made
on the date of this Amendment (except to the extent that such representations and warranties speak to a specific date), (f) it is in full compliance
with all covenants and agreements contained in each Loan Document to which it is a party, and (g) no Default or Potential Default (other than the
Existing Defaults) has occurred and is continuing. The representations and warranties made in this Amendment shall survive the execution and
delivery of this Amendment. No investigation by Lender is required for Lender to rely on the representations and warranties in this Amendment.
3
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
6. Scope of Amendment; Reaffirmation; RELEASE. All references to the Credit Agreement shall refer to the Credit Agreement as
amended by this Amendment. Except as affected by this Amendment, the Loan Documents are unchanged and continue in full force and effect.
However, in the event of any inconsistency between the terms of the Credit Agreement (as amended by this Amendment) and any other Loan
Document, the terms of the Credit Agreement shall control and such other document shall be deemed to be amended to conform to the terms of
the Credit Agreement. Borrower hereby reaffirms its obligations under the Loan Documents to which it is a party and agrees that all Loan
Documents to which it is a party remain in full force and effect and continue to be legal, valid, and binding obligations enforceable in accordance
with their terms (as the same are affected by this Amendment). AS A MATERIAL PART OF THE CONSIDERATION FOR LENDER ENTERING
INTO THIS AMENDMENT, BORROWER HEREBY RELEASES AND FOREVER DISCHARGES LENDER (AND ITS SUCCESSORS, ASSIGNS,
AFFILIATES, OFFICERS, MANAGERS, DIRECTORS, EMPLOYEES, AND AGENTS) FROM ANY AND ALL CLAIMS, DEMANDS, DAMAGES,
CAUSES OF ACTION, OR LIABILITIES FOR ACTIONS OR OMISSIONS (WHETHER ARISING AT LAW OR IN EQUITY, AND WHETHER
DIRECT OR INDIRECT) IN CONNECTION WITH THE CREDIT AGREEMENT AND THE OTHER LOAN DOCUMENTS PRIOR TO THE DATE
OF THIS AMENDMENT, WHETHER OR NOT HERETOFORE ASSERTED, AND WHICH BORROWER OR ANY COMPANY MAY HAVE OR
CLAIM TO HAVE AGAINST LENDER.
7. Miscellaneous.
( a ) N❑ Waiver of Defaults. This Amendment does not constitute (i) a waiver of, or a consent to, (A) any provision of the
Credit Agreement or any other Loan Document not expressly referred to in this Amendment, or (B) any present or future violation of, or
default under, any provision of the Loan Documents, or (ii) a waiver of Lender’s right to insist upon future compliance with
each term, covenant, condition and provision of the Loan Documents.
( b ) Form. Each agreement, document, instrument or other writing to be furnished Lender under any provision of this
Amendment must be in form and substance satisfactory to Lender and its counsel.
( c ) Headings. The headings and captions used in this Amendment are for convenience only and will not be deemed to
limit, amplify or modify the terms of this Amendment, the Credit Agreement, or the other Loan Documents.
( d ) C❑sts, Expenses and Att❑rneys’ Fees. Borrower agrees to pay or reimburse Lender on demand for all its reasonable
out-of-pocket costs and expenses incurred in connection with the preparation, negotiation, and execution of this Amendment, including,
without limitation, the reasonable fees and disbursements of Lender’s counsel.
(e) Success❑rs and Assigns. This Amendment shall be binding upon and inure to the benefit of each of the undersigned
and their respective successors and permitted assigns.
( f ) Multiple Counterparts. This Amendment may be executed in any number of counterparts with the same effect as if all
signatories had signed the same document. All counterparts must be construed together to constitute one and the same
instrument. This Amendment may be transmitted and signed by facsimile or portable document format (PDF). The effectiveness of
any such documents and signatures shall, subject to applicable law, have the same force and effect as manually-signed originals and
shall be binding on Borrower and Lender. Lender may also require that any such documents and signatures be confirmed by a
manually- signed original; pr❑vided that the failure to request or deliver the same shall not limit the effectiveness of any facsimile or
PDF document or signature.
4
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
(g) Governing Law. This Amendment and the other Loan Documents must be construed, and their performance enforced,
under Texas law.
(h) Arbitrati❑n. Upon the demand of any party to this Amendment, any dispute shall be resolved by binding arbitration as
provided for in Section 13.9 of the Credit Agreement.
( i ) Entirety. The Loan Documents (as amended hereby) Represent the Final Agreement Between Borrower and
Lender and May Not Be Contradicted by Evidence of Prior, Contemporaneous, or Subsequent Oral Agreements by the Parties. There
Are No Unwritten Oral Agreements among the Parties.
[Signatures are on the f❑ll❑wing pages.]
5
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The Amendment is executed as of the date set out in the preamble to this Amendment.
BORROWER:
VERTEX ENERGY, INC.,
a Nevada corporation
By: /s/ Chris Carlson
Chris Carlson
Chief Financial Officer and Secretary
Signature Page to Second Amendment to Credit Agreement
6
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
LENDER:
BANK OF AMERICA, N.A.
By: /s/ Christopher King
Christopher King
Senior Vice President
Signature Page to Waiver and Second Amendment to Credit Agreement
7
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
GUARANTORS’ CONSENT AND AGREEMENT
TO
WAIVER AND SECOND AMENDMENT TO CREDIT AGREEMENT
As an inducement to Lender to execute, and in consideration of Lender’s execution of, this Amendment, each of the undersigned hereby
consents to this Amendment and agrees that this Amendment shall in no way release, diminish, impair, reduce or otherwise adversely affect the
obligations and liabilities of the undersigned under the Guaranty executed by the undersigned in connection with the Credit Agreement, or under
any Loan Documents, agreements, documents or instruments executed by the undersigned to create liens, security interests or charges to secure
any of the Obligation, all of which are in full force and effect. Each of the undersigned further represent and warrant to Lender that (a) the
representations and warranties in each Loan Document to which the undersigned is a party are true and correct in all material respects on and as
of the date of this Amendment as though made on the date of this Amendment (except to the extent that such representations and warranties
speak to a specific date), (b) the undersigned is in full compliance with all covenants and agreements contained in each Loan Document to which
it is a party, and (c) no Default or Potential Default (other than the Existing Defaults) has occurred and is continuing. Each Guarantor hereby
releases Lender from any liability for actions or omissions in connection with the Loan Documents prior to the date of this Amendment. This
Consent and Agreement shall be binding upon each of the undersigned, and its respective legal representatives and permitted assigns, and shall
inure to the benefit of Lender, and its successors and assigns.
GUARANTORS:
VERTEX ACQUISITION SUB, LLC,
a Nevada limited liability company
By: /s/ Chris Carlson
Chris Carlson
Chief Financial Officer and Secretary
CEDAR MARINE TERMINALS, LP,
a Texas limited partnership
By: Vertex II GP, LLC,
a Nevada limited liability company,
its general partner
By: /s/ Chris Carlson
Chris Carlson
Chief Financial Officer and Secretary
Guarantors’ Consent to Waiver and Second Amendment to Credit Agreement
8
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
CROSSROAD CARRIERS, L.P.,
a Texas limited partnership
By: Vertex II GP, LLC,
a Nevada limited liability company,
its general partner
By: /s/ Chris Carlson
Chris Carlson
Chief Financial Officer and Secretary
VERTEX RECOVERY, L.P.,
a Texas limited partnership
By: Vertex II GP, LLC,
a Nevada limited liability company,
its general partner
By: /s/ Chris Carlson
Chris Carlson
Chief Financial Officer and Secretary
H & H OIL, L.P.,
a Texas limited partnership
By: Vertex II GP, LLC,
a Nevada limited liability company,
its general partner
By: /s/ Chris Carlson
Chris Carlson
Chief Financial Officer and Secretary
VERTEX II GP, LLC,
a Nevada limited liability company
By: /s/ Chris Carlson
Chris Carlson
Chief Financial Officer and Secretary
Guarantors’ Consent to Waiver and Second Amendment to Credit Agreement
9
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
EXHIBIT 21.1
Subsidiaries
·
·
Vertex Merger Sub, LLC, a California Limited Liability Company
Vertex Acquisition Sub, LLC, a Nevada Limited Liability Company (“Vertex Acquisition”)
Wholly-owned subsidiaries of Vertex Acquisition:
❑ Cedar Marine Terminals, L.P., a Texas limited partnership
❑ Crossroad Carriers, L.P., a Texas limited partnership
❑ Vertex Recovery L.P., a Texas limited partnership
❑ H&H Oil, L.P., a Texas limited partnership
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of
Vertex Energy, Inc.
We consent to incorporation by reference in Registration Statement No. 333-162290 on Form S-8 of Vertex Energy, Inc. (the “Company”), of our
report dated March 20, 2013, relating to the consolidated financial statements of the Company appearing in this Annual Report on Form 10-K of
the Company for the year ended December 31, 2012.
LBB & Associates Ltd., LLP
Houston, Texas
March 21, 2013
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
EX-31.1 7 ex31-1.htm
EXHIBIT 31.1
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Benjamin P. Cowart, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Vertex Energy, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of a Quarterly Report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal
control over financial reporting.
Date: March 21, 2013
By: /s/ Benjamin P. Cowart
Benjamin P. Cowart
Chief Executive Officer
(Principal Executive Officer)
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
EX-31.2 8 ex31-2.htm
EXHIBIT 31.2
I, Chris Carlson, certify that:
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
1.
I have reviewed this Annual Report on Form 10-K of Vertex Energy, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of a Quarterly Report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal
control over financial reporting.
Date: March 21, 2013
By:
/s/ Chris Carlson
Chris Carlson
Chief Financial Officer
(Principal Accounting Officer)
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
EX-32.1 9 ex32-1.htm
EXHIBIT 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SS. 1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Vertex Energy, Inc. (the "Company") on Form 10-K for the period ended December 31, 2012, as
filed with the Securities and Exchange Commission (the "Report"), I, Benjamin P. Cowart, Principal Executive Officer of the Company, certify,
pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
March 21, 2013
/s/ Benjamin P. Cowart
Benjamin P. Cowart
Chief Executive Officer
(Principal Executive Officer)
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
EX-32.2 10 ex32-2.htm
EXHIBIT 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SS. 1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Vertex Energy, Inc. (the "Company") on Form 10-K for the period ended December 31, 2012, as
filed with the Securities and Exchange Commission (the "Report"), I, Chris Carlson, Principal Accounting Officer of the Company, certify, pursuant
to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
March 21, 2013
/s/ Chris Carlson
Chris Carlson
Chief Financial Officer
(Principal Accounting Officer)
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Exhibit 99.1
Glossary of Selected Terms
The following abbreviations and definitions are terms commonly used in Vertex Energy, Inc.’s (the “Company’s”) filings with the Securities
and Exchange Commission:
No. 2 Oil - A high sulfur diesel oil, which is used in off-road equipment and in the marine industry such as tug boats and ships. It is also
used to blend fuel oil and has multiple applications to fuel furnaces (“boilers”). It is a low viscosity, flammable liquid petroleum product.
No. 6 Oil - A lesser grade of oil than No. 2 oil, it is used only in certain applications.
Aggregators - Specialized businesses that purchase used oil and petroleum by-products from multiple collectors and sell and deliver it as
feedstock to processors.
Asphalt Flux - Also called asphalt extender or blowdown, asphalt flux is a by-product of re-refining used oil suitable for blending with
bitumen (the geological term for naturally occurring deposits of solid or semi-solid petroleum) or asphalt to form a product of greater fluidity or
softer consistency. It is a thick, relatively nonvolatile fraction of petroleum used as flux (i.e., a substance used to promote fusion). It is a derivative,
nearly or completely solid at room temperature, of certain crude oils. This black, tarry material usually comes from vacuum residue (i.e., the
residue left over from vacuum distillation (see below)). It has several industrial applications. Pavers heat it to liquid form and mix it in gravel to
make road surface materials called “blacktop,” “madcadam,” “tarmac,” or “asphalt.” Builders use it to make and join bricks, to coat roofs, and to
form shingles. It also glues together various manufactured goods.
Base Oil - The name given to lubrication grade oils initially produced from refining crude oil (mineral base oil) or through chemical
synthesis (synthetic base oil). In general, only 1% to 2% of a barrel of crude oil is suitable for refining into base oil. The majority of the barrel is
used to produce gasoline and other hydrocarbons.
Black Oil - Any used or unused petroleum or synthetic oil that is dark in color and heavier than diesel. Examples of black oil include used
motor oil, No. 6 fuel oil, marine cutterstock, gasoil, and other residual fuel oil.
Blender - An entity that combines various petroleum distillates to make a finished product that meets the applicable customer’s
specification. In this combining process, each hydrocarbon stream is analyzed through a distillation cure as well as other testing to help ensure the
quality of product is met. Through this process, each stream is blended into a specific product, including gasoline, No. 2 oil, marine diesel and fuel
oils.
Blendstock - A bulk liquid component combined with other materials to produce a finished petroleum product.
Bunker Fuel - Any type of fuel oil used aboard ships, and includes heavy oil and No. 6 Oil.
Collectors - Typically local businesses that purchase used oil from generators and provide on-site collection services.
Cracking - The process whereby large hydrocarbons are broken (or cracked) into smaller hydrocarbons, which is usually done at high
temperatures and pressures.
Cutterstock - Fuel oil used as a blending agent for other fuels to, for example, lower viscosity.
Distillate Fuel - A general classification for one of the petroleum fractions or cuts produced in conventional distillation operations; includes
marine diesel oil and diesel fuels.
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Feedstock – 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 - 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).
Generators - Entities that generate used oil through their daily operations such as automotive businesses conducting oil changes on consumer
and commercial vehicles and industrial users changing lubricants on machinery and heavy equipment.
Hydrocarbons - An organic compound consisting entirely of hydrogen and carbon. When used in the Company’s filings the term
generally refers to crude oil and its derivatives.
Hydrotreating - Processing feedstock with hydrogen to remove impurities such as sulfur, chlorine, and oxygen and to stabilize the end
product.
Industrial Burners – Entities which burn combustible waste products (when used in the Company’s filings, generally used motor oil and
re-refined hydrocarbon feedstocks) to generate power, heat or for other industrial purposes.
Light Fuels – Fuels such as gasoline and kerosene.
Lubricating Base Oil – A crude oil derivative used for lubrication.
Marine Diesel Oil - A blend of petroleum products that is used as a fuel in the marine industry.
Naphthas - Refers to a number of flammable liquid mixtures of hydrocarbons, i.e., a component of natural gas condensate or a distillation
product from petroleum, coal tar or peat boiling in a certain range and containing certain hydrocarbons. It is a broad term covering among the
lightest and most volatile fractions of the liquid hydrocarbons in petroleum. Naphtha is a colorless to reddish-brown volatile aromatic liquid, very
similar to gasoline.
Processors – Entities (usually re-refineries) which utilize a processing technology to convert used oil or petroleum by-products into a
higher-value feedstock or end-product.
Pygas (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, butane, propane, butane, naphtha, and gasoil. Pygas can serve as a high-octane
blendstock for motor gasoline or as a feedstock for an aromatics extraction unit.
Re-Refined Base Oil - The end product of used oil that is first cleansed of its contaminants, such as dirt, water, fuel, and used additives
through vacuum distillation. The oil is also generally hydrotreated to remove any remaining chemicals. This process is very similar to what
traditional oil refineries do to remove base oil from crude oil. Finally, the re-refined oil is combined with a fresh additive package by blenders to
bring it up to industry performance levels.
Re-Refining - A process involving extensive physical and chemical treatment of used motor oil to yield a high quality marine diesel oil or
lubricant base stock comparable to a virgin lubrication oil product.
Refining - The process of purification of a substance. The refining of liquids is often accomplished by distillation or fractionation. Gases
can be refined in this way as well, by being cooled and/or compressed until they liquefy. Gases and liquids can also be refined by extraction with a
selective solvent that dissolves away either the substance of interest, or the unwanted impurities.
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Toll Processing/Third Party Processing - Refining or petrochemicals production done on a fee basis. A plant owner puts another party’s
feedstock through his equipment and charges for this service. A portion of the product retained by the processor may constitute payment. This
form of compensation occurs frequently in refining because the feedstock supplier often is interested in retaining only one part of the output slate.
Transmix - A mix of transportation fuels, usually gasoline and diesel, created by mixing different specification products during pipeline
transportation, stripping fuels from barges and bulk fuel terminals. Transmix processing plants distill the transmix back into specification products,
such as unleaded gasoline and diesel fuel.
Used Oil - Any oil that has been refined from crude oil, or any synthetic oil that has been used, and as a result of use or as a
consequence of extended storage or spillage has been contaminated with physical or chemical impurities. Examples of used oil include used
motor oil, hydraulic oil, transmission fluid, and diesel and transformer oil.
Virgin Base Oil – Base oil which has not previously been recycled or re-refined.
Vacuum Distillation – A process that removes emulsified contaminated water and separates used oil into base oil lubricant and light
fuels.
VGO -Vacuum Gas Oil (also known as cat feed) - a feedstock for a fluid catalytic cracker typically found in a crude oil refinery and used to
make gasoline No. 2 oil and other byproducts.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.