SECURITIES & EXCHANGE COMMISSION EDGAR FILING
Vertex Energy Inc.
Form: 10-K
Date Filed: 2017-03-14
Corporate Issuer CIK: 890447
© Copyright 2017, 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, 2016
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. ❑
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 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 $26,171,510.
State the number of shares of the issuer’s common stock outstanding, as of the latest practicable dat e: 33,258,027 shares of common stock issued and
outstanding as of March 13, 2017 (which number includes 1,258,928 shares of common stock held in escrow in order to satisfy the indemnification obligations of
a certain prior acquisition and sale transaction undertaken by us, of which 1,108,928 shares have been returned to us and are in the process of being canceled as
of the date of this filing).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement relating to its 2017 annual meeting of shareholders (the “ 2017 Proxy Statement”) are incorporated by
reference into Part III of this Annual Report on Form 10-K where indicated. The 2017 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.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2016
TABLE OF CONTENTS
Part I
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
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 of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
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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F-1
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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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risks associated with our outstanding credit facilities, including amounts owed, restrictive covenants, security interests thereon and our ability to repay
such facilities and amounts due thereon when due;
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;
the impact of competitive services and products;
our ability to integrate acquisitions;
our ability to complete future acquisitions;
our ability to maintain insurance;
potential future litigation, judgments and settlements;
rules and regulations making our operations more costly or restrictive;
changes in environmental and other laws and regulations and risks associated with such laws and regulations;
economic downturns both in the United States and globally;
risk of increased regulation of our operations and products;
negative publicity and public opposition to our operations;
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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disruptions in the infrastructure that we and our partners rely on;
an inability to identify attractive acquisition opportunities and successfully negotiate acquisition terms;
our ability to effectively integrate acquired assets, companies, employees or businesses;
liabilities associated with acquired companies, assets or businesses;
interruptions at our facilities;
required earn-out payments and other contingent payments we are required to make;
unexpected changes in our anticipated capital expenditures resulting from unforeseen required maintenance, repairs, or upgrades;
our ability to acquire and construct new facilities;
certain events of default which have occurred under our debt facilities and previously been waived;
prohibitions on borrowing and other covenants of our debt facilities;
our ability to effectively manage our growth;
repayment of and covenants in our debt facilities;
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” incorporated by reference 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.
Unless the context requires otherwise, references to the " Company,""we," " us," " our," " Vertex," " Vertex Energy" and " Vertex Energy, Inc." refer
specifically to Vertex Energy, Inc. and its consolidated subsidiaries.
In addition, unless the context otherwise requires and for the purposes of this report only:
"Exchange Act" refers to the Securities Exchange Act of 1934, as amended;
"SEC" or the " Commission" refers to the United States Securities and Exchange Commission; and
"Securities Act" refers to the Securities Act of 1933, as amended.
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Where You Can Find Other Information
We file annual, quarterly, and current reports, proxy statements and other information with the Securities and Exchange Commission (“ SEC”). Our SEC
filings are available to the public over the Internet at the SEC’s website at www.sec.gov and are available for download, free of charge, soon after such reports
are filed with or furnished to the SEC, on the “Investor Relations,” “SEC Filings” page of our website at www.vertexenergy.com. Information on our website is not
part of this Report, and we do not desire to incorporate by reference such information herein. You may also read and copy any documents we file with the SEC at
the SEC’s Public Reference Room at 100 F Street N.E., Washington, D.C. 20549. You can also obtain copies of the document upon the payment of a duplicating
fee to the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the Public Reference Room. The SEC maintains an Internet
site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC like us. Our SEC filings
are also available to the public from the SEC’s website at http://www.sec.gov. Copies of documents filed by us with the SEC are also available from us without
charge, upon oral or written request to our Secretary, who can be contacted at the address and telephone number set forth on the cover page of this Report.
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.OB” effective May 4, 2009.
Subsequently, effective February 13, 2013, our common stock began trading on the NASDAQ Capital Market under the symbol “VTNR”. 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.
Prior Material Acquisitions
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” or "Cedar Marine Terminals"), which operates a 19-acre bulk liquid storage facility and terminal on the Houston
Ship Channel, which serves as a truck-in, barge-out facility and provides throughput terminal operations and which terminal is also the site of our proprietary,
patented, Thermal Chemical Extraction Process ("TCEP") (described below); Crossroad Carriers, L.P. (“ Crossroad”) is a 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. (“Vertex
Recovery”), 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, which it facilitates through a network of independent recyclers and franchise collectors; and H&H Oil, L.P. (“H&H Oil”), which
collects and recycles used oil and residual materials from customers based in Austin, Baytown, Dallas, San Antonio and Corpus Christi, Texas and B&S LP
contributed real estate associated with the operations of H&H Oil.
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.
In October, 2013, January 2014 and September 2014, we completed various transactions whereby we acquired 100% of E-Source Holdings, LLC (“ E-
Source”), a company that leases and operates a facility located in Houston, Texas, and provides dismantling, demolition, decommission and marine salvage
services at industrial facilities throughout the Gulf Coast. E-Source also owns and operates a fleet of trucks and other vehicles used for shipping and handling
equipment and scrap materials. E-Source falls under our Recovery division.
In May, 2014, we acquired certain of Omega Refining, LLC's (“ Omega Refining”), Bango Refining NV, LLC (“ Bango Refining”) and Omega Holdings
Company LLC (“Omega Holdings” and collectively with Omega Refining and Bango Refining, “ Omega” or the “sellers”) assets related to (1) the operation of oil re-
refineries and, in connection therewith, purchasing used lubricating oils and re-refining such oils into processed oils and other products for the distribution, supply
and sale to end-customers and (2) the provision of related products and support services. Specifically, the assets included Omega’s Marrero, Louisiana plant
which produces vacuum gas oil (VGO) and the Bango, Nevada plant which produces base lubricating oils. Omega also operated Golden State Lubricants Works,
LLC (“Golden State”), a strategic blending and storage facility located in Bakersfield, California,
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which we acquired in the acquisition and have since ceased operations at. In connection with the acquisition, we also acquired certain of Omega's prepaid assets
and inventory. We acquired the assets in the name of our indirect wholly-owned subsidiary, Vertex Refining LA, LLC. The assets and operations acquired from
Omega fall under our Black Oil division.
In December, 2014 , we acquired substantially all of the assets of Warren Ohio Holdings Co., LLC, f/k/a Heartland Group Holdings, LLC (“ Heartland”)
related to and used in an oil re-refinery and, in connection with the collecting, aggregating and purchasing of used lubricating oils and the re-refining of such oils
into processed oils and other products for the distribution, supply and sale to end-customers, including raw materials, finished products and work-in-process,
equipment and other fixed assets, customer lists and marketing information, the name ‘Heartland’ and other related trade names, Heartland’s real property
relating to its used oil refining facility located in Columbus, Ohio, used oil storage and transfer facilities located in Columbus, Zanesville and Norwalk, Ohio
(provided that the acquisition of the Norwalk, Ohio location is subject to the terms and conditions of the Second Amendment), and leases related to storage and
transfer facilities located in Zanesville, Ohio, Mount Sterling, Kentucky, and Ravenswood, West Virginia (collectively, the “Heartland Assets”). The Heartland
Assets were acquired by our indirect wholly-owned subsidiary, Vertex Refining OH, LLC ("Vertex OH"). The assets and operations acquired from Heartland fall
under our Black Oil division.
In August 2015, H&H Oil acquired a collection route consisting of collecting, shipping and selling used oil, oil filters, antifreeze and other related services
in the state of Louisiana, but excluding industrial customers, maritime customers, off shore customers, dockside locations, industrial services, used absorbent
services, wastewater generating customers and collectors/transporters of crankcase used oil, petroleum fuel reclamation customers and crude oil
producers/processing/recovery/reclamation customers of Aaron Oil Company ("Aaron Oil"). Included in the purchase were certain trucks and other assets owned
by Aaron Oil and certain contract rights.
Additional information regarding the acquisitions above can be found in our Annual Report on Form 10-K for the year ended December 31, 2015, filed
with the Commission on April 4, 2016.
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 three divisions Black
Oil, Refining and Marketing, and Recovery.
We currently provide our services in 15 states, primarily in the Gulf Coast and Central Midwest regions of the United States. For the rolling twelve month
period ending December 31, 2016, we aggregated approximately 91 million gallons of used motor oil and other petroleum by-product feedstocks and managed
the re-refining of approximately 65 million gallons of used motor oil with our proprietary TCEP, VGO and Base Oil processes.
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. We also
acquired our Marrero, Louisiana facility, which facility re-refines used motor oil and also produces vacuum gas oil ("VGO,") and our Myrtle Grove re-refining
complex in Belle Chasse, Louisiana in May 2014. At the same time we acquired Golden State Lubricant Works, LLC ("Golden State"), a blending and storage
facility in Bakersfield, California which we no longer operate as of the date of this report.
Our Recovery division includes a generator solutions company for the proper recovery and management of hydrocarbon streams as well as a company
named E-Source. E-Source provides dismantling, demolition, decommission and marine salvage services at industrial facilities throughout the Gulf Coast. E-
Source also owns and operates a fleet of trucks and other vehicles that are used for shipping and handling equipment and scrap materials.
Black Oil Division
Our Black Oil division is engaged in operations across the entire used motor oil recycling value chain including collection, aggregation, transportation,
storage, refinement, and sales of aggregated feedstock and re-refined products to end users. We collect
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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 26 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 15 transportation trucks and more than 150
aboveground storage tanks with over 7.3 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. We also use our proprietary TCEP technology to re-refine used oil into marine fuel cutterstock and a
higher-value feedstock for further processing (we are currently utilizing TCEP to pre-treat our used motor oil feedstock prior to shipping them to our facility in
Marrero, Louisiana; but have not operated our TCEP for the purpose of producing finished cutterstock since the third quarter of fiscal 2015, due to market
conditions). In addition, at our Marrero, Louisiana facility we produce a Vacuum Gas Oil (VGO) product that is sold to refineries as well as to the marine fuels
market. At our Columbus, Ohio facility (Heartland Petroleum) we produce a base oil product that is sold to lubricant packagers and distributors.
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 agreement in place with 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.
Recovery Division
The Recovery division is a generator solutions company for the proper recovery and management of hydrocarbon streams. The Recovery division also
provides industrial dismantling, demolition, decommissioning, investment recovery and marine salvage services in industrial facilities. The Company (through this
division) owns and operates a fleet of eight trucks and heavy equipment used for processing, shipping and handling of reusable process equipment and other
scrap commodities.
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 patented TCEP. TCEP is a technology which utilizes thermal and chemical dynamics to extract impurities from
used oil which increases the value of the feedstock. We intend to continue to develop our TCEP technology and design with the goal of producing additional re-
refined products, including lubricating base oil.
TCEP differs from conventional re-refining technologies, such as vacuum distillation and hydrotreatment, by relying more heavily on chemical processes
to remove impurities rather than temperature and pressure. Therefore, the capital requirements to build a TCEP plant are typically much less than a traditional re-
refinery because large feed heaters, vacuum distillation columns, and a hydrotreating unit are not required. The end product currently produced by TCEP is used
as fuel oil cutterstock. Conventional re-refineries produce lubricating base oils or product grades slightly lower than base oil that can be used as industrial fuels or
transportation fuel blendstocks.
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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.We are currently utilizing TCEP
to pre-treat our used motor oil feedstocks prior to shipping them to our facility in Marrero, Louisiana; but have not operated our TCEP for the purpose of producing
finished cutterstock since the third quarter of fiscal 2015, due to market conditions.
Organizational Structure
The following chart reflects our current organization structure, including significant subsidiaries (all of which are wholly-owned, except as discussed
below):
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 400 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. Used oil is any oil that has been refined from crude oil or any synthetic oil that has been used and, as a result of such use, is contaminated by physical or
chemical impurities. Physical impurities could include contamination by metal shavings, sawdust, or dirt. Chemical impurities could include contamination by water
or benzene, or degradation of lubricating additives.
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
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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. Used oil is usually 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.
In the U.S., we believe that of the approximately 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 stay basically unchanged in 2017 as no additional re-refining capacity is scheduled to come on-line. As of the date of this
Report, the approximate market price for used oil at the generator level is approximately $0.25 per gallon charge, the approximate market price of intermediate re-
refined products ranges from $.75 to $1.35 per gallon, and the approximate price for lubricating base oil ranges from $1.20 to $1.60 per gallon, representing a
U.S. market size of approximately $1.0 - $1.5 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; one gallon of used oil can contaminate up to 1 million gallons of fresh drinking water. Additionally, according to the
Environmental Protection Agency, it takes 42 gallons of crude oil, but only 1 gallon of used oil, to produce 2.5 quarts of new, high-quality lubricating oil.
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 fuels, to offset
operational costs. Therefore, the commercial price of used oil is typically slightly less than the base fuels for the burners. 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.
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 4,500 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.
Strategic Relationships.
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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 up to 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.
Notwithstanding the lower cost of TCEP plants, with oil at its current prices, we do not believe that it makes economic sense to expand our TCEP technology at
this time due to the fixed operating costs involved.
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 customer relationships.
Diversified End Product Sales.
We believe that the diversity of the products we sell reduces our overall risk and exposure to price 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.
Our Business Strategy
The principal elements of our strategy include:
Pursue Strategic Acquisitions and Partnerships
We plan to grow market share by consolidating feedstock supply through partnering with or acquiring collection and aggregation assets. Our executive
team has a proven ability to evaluate resource potential and identify acquisition targets. The 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. We also intend to diversify our revenue by acquiring complementary recycling service businesses, refining assets and technologies, and
other
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vertically integrated businesses or assets. We believe we can realize synergies on acquisitions by leveraging our customer and vendor relationships,
infrastructure, and personnel, and by eliminating duplicative overhead costs.
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
we will have the opportunity to secure larger customer accounts that require a partner who can consistently deliver high volumes.
Re-Refine Higher Value End Products
We intend to develop, lease, or acquire technologies to re-refine our feedstock supply into higher value end products, including assets or technologies
which complement TCEP. Currently, we are using TCEP to pre-treat our used oil feedstock prior to sending it to our facility in Marrero, Louisiana for further
processing; but have not operated our TCEP for the purpose of producing finished cutterstock since the third quarter of fiscal 2015, due to market conditions. We
hope that continued improvements in our technologies 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.
Products and Services
We generate substantially all of our revenue from the sale of five product categories. All of these products are commodities that are subject to various
degrees of product quality and performance specifications.
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.
Base Oil
An oil to which other oils or substances are added to produce a lubricant. Typically the main substance in lubricants, base oils, are refined from crude oil.
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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 4,500 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.
Customers
The Black Oil division sells used oil, VGO, base oil and other petroleum feedstocks to numerous customers in the Gulf Coast and Midwest regions of the
United States. The primary customers of its products are packagers, distributers, blenders and industrial burners, as described above as well as re-refiners of the
feedstock. The Black Oil division is party to various feedstock sale agreements whereby we sell used oil feedstock to third parties. The agreements provide for us
to sell certain minimum gallons of used oil feedstock per month at a price per barrel equal to our direct costs, plus certain commissions, based on the quality and
quantity of the used oil we supply.
The Recovery division does not rely solely on contracts, but mainly on the spot market as well as a strategic network of customers and vendors to support
the purchase and sale of its products which are commodities. It also relies on project based work which it bids on from time to time of which there is no guarantee
or assurance of repeat business. The E-Source business which is part of the Recovery division relies heavily on numerous Master Service Agreements which it
has in place with large facilities, such as power plants, petroleum refineries and major industrial clients.
KMTEX Tolling Agreement
On or around April 17, 2013, and effective June 1, 2012, we entered into a new Tolling Agreement with KMTEX, Ltd. (“ KMTEX” and the agreement as
amended to date, the “Tolling Agreement”). The Company was previously party to a tolling agreement with KMTEX which expired pursuant to its terms on June
30, 2010, provided that the parties had continued to operate under the terms of the expired agreement until their entry into the April 2013 Tolling Agreement.
Pursuant to the Tolling Agreement, KMTEX agreed to process feedstock of certain petroleum distillates, which we provide to KMTEX, into more valuable
feedstocks, including pygas, gasoline blend stock and MDO/cutter stock. The Tolling Agreement had an expiration date of June 30, 2014 (the “Initial Term”),
provided that if not terminated by either party by written notice to the other, received within ninety (90) days prior to the expiration of the Initial Term (or any
extension term), the agreement automatically renewed for a successive one (1) year period and could be automatically extended for up to six (6) more extension
terms.
In November 2013 and effective November 1, 2013, we entered into a First Amendment to Processing Agreement with KMTEX LLC (previously KMTEX
Ltd., hereafter “KMTEX”), which amended the Tolling Agreement. The amendment formally extended the date of the initial term of the Tolling Agreement to
December 31, 2015, provided that if not terminated by either party by written notice to the other, received within ninety (90) days prior to the expiration of the
initial term, as amended (or any Extension Term, defined below), the agreement would automatically renew for a successive one (1) year period. The Tolling
Agreement could be automatically extended for up to six (6) extension terms from the end of the extended initial term. The amendment also updated the pricing
terms of the original agreement and required us to make certain capital expenditures at the KMTEX facility which have been made to date.
On December 3, 2015, and effective January 1, 2016, we entered into a Second Amendment to Processing Agreement with KMTEX. The amendment
formally extended the date of the initial term of the Tolling Agreement to December 31, 2016, provided that if not terminated by either party by written notice to
the other, received within ninety (90) days prior to the expiration of the initial term, as amended (or any extension term), the agreement automatically renews for a
successive one (1) year period The amendment also updated the pricing terms of the agreement.
On December 14, 2016, and effective January 1, 2017, we entered into a Third Amendment to Processing Agreement with KMTEX. The amendment
formally extended the date of the initial term of the Tolling Agreement to December 31, 2018, provided that if not terminated by either party by written notice to
the other, received within ninety (90) days prior to the expiration of the initial term, as amended (or any Extension Term, defined below), the agreement
automatically renews for a
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successive one (1) year period (an “Extension Term”). The Tolling Agreement can be automatically extended for up to six (6) Extension Terms from the end of
the extended initial term. The amendment also updated the pricing terms of the agreement.
Notwithstanding the above, either party can terminate the Tolling Agreement at any time with ninety (90) days prior written notice for any reason and with
thirty (30) days written notice upon the occurrence of certain material termination events as described in greater detail in the agreement. In connection with and
pursuant to the Tolling Agreement, we pay KMTEX certain monthly tank rental fees, truck and rail car fees, and processing fees based on the weight of the
material processed by KMTEX, as well as certain disposal fees and other fees. Each year of the agreement, beginning on the 12 month anniversary of the
effective date, the parties agreed to review and increase the fees provided for in the agreement in accordance with among other things, various consumer price
index benchmarks, as mutually agreed.
The Tolling Agreement also provides that, for materials delivered to KMTEX by rail, barge, drum, or truck, KMTEX is required to obtain the Bill of Lading
and Material Safety Data Sheet that accompany such materials and not accept any materials not accompanied by a Uniform Hazardous Waste Manifest
(promulgated by the Environmental Protection Agency or other Federal or State Government). The Company is also required to indemnify KMTEX against the
acceptance of any material later classified as a hazardous waste. The agreement requires KMTEX to be responsible for all leaks, spills, discharges and releases
which occur in connection with the performance of the agreement, except due to the Company’s gross negligence. Finally, the agreement requires each party to
indemnify the other against any liability as a result of death or bodily injury to any person, destruction or damage to property, contamination of, adverse effects
on, or imminent or substantial endangerment of, or release or threat of release into the environment, or any threatened or actual release of hazardous substance,
or any violation or alleged violation of or liability under any governmental laws, regulations, rules or orders to the extent caused by, arising out of or in any manner
connected with such indemnifying party’s negligent acts, omissions, breaches of the agreement or failure to comply with applicable laws in the performance
thereof, subject to certain exclusions described in the agreement.
Swap Agreement and Base Oil Agreement
A required condition to closing the transactions contemplated by the January 28, 2016 Sale Agreement (described and defined below under “ 2016
Material Events - Purchase and Sale Agreement, Churchill County, Nevada Plant ”), was that we (through Vertex Operating) and Safety-Kleen Systems, Inc.
(“Safety-Kleen”) enter into a Swap Agreement (the “ Swap Agreement”), which was entered into on January 29, 2016. The Swap Agreement has a term of five
years, beginning when the Bango Plant (defined below under “2016 Material Events - Purchase and Sale Agreement, Churchill County, Nevada Plant ”) is
operational, which plant became operational in the summer of 2016, and automatically renews for additional one year terms thereafter unless either party provides
the other 90 days prior written notice of their intention not to renew prior to any automatic extension. Pursuant to the Swap Agreement, we and Safety-Kleen
agreed to swap certain quantities of used oil feedstock (the agreement includes monthly maximums, quarterly minimums and maximums, and annual maximums
of used oil feedstock volume required to be ‘swapped’) between the Bango Plant (which will then be owned and operated by Safety-Kleen) and our Marrero,
Louisiana plant and/or the Cedar Marine Terminal in Baytown, Texas, on a monthly, quarterly and annual basis, with any shortfall in the amount of used oil
feedstock ‘swapped’ on a quarterly basis, being paid for in cash based on a discount to U.S. Platts mid-range per gallon rate for Gulf Coast No. 6, 3% oil (the
“Platts”). The Swap Agreement can be terminated with 30 days prior written notice in the event either party fails to meet the specifications for oil feedstock set
forth in the agreement, a party fails to deliver the required minimum quarterly volumes of oil feedstock during any three consecutive quarters, or a party materially
breaches a term of the agreement.
Additionally, we (through Vertex Operating) and Safety-Kleen also entered into a Base Oil Agreement in connection with, and as a required condition of,
the closing of the Sale Agreement (the “Base Oil Agreement”). The Base Oil Agreement provides for us to purchase from Safety-Kleen, and Safety-Kleen to sell
to us, certain required quantities of base oils and other finished lubricants described in greater detail in the Base Oil Agreement (the “Base Oil”)(the agreement
contains quarterly and annual maximum volumes of Base Oil to be acquired by us). The agreement has a term of five years and automatically renews for
additional one year terms thereafter unless either party provides the other 90 days prior written notice of their intention not to renew prior to any automatic
extension.
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., Heritage-Crystal Clean, Inc., and FCC Environmental (formerly Siemens Hydrocarbon Recovery Services), Thermo Fluids Inc., and Flex Oil
Service, LLC. These competitors actively seek to purchase feedstock from local, regional and industrial collectors, refineries, pipelines and other sources.
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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 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 and our wholly and majority owned subsidiaries have 205 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.
Governmental Regulation, Including Environmental Regulation and Climate Change
Our operations are subject to stringent United States federal, state and local laws and regulations concerning the discharge of materials into the
environment or otherwise relating to health and safety or the protection of the environment. Additional laws and regulations, or changes in the interpretations of
existing laws and regulations, that affect our business and operations may be adopted, which may in turn impact our financial condition.
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 2016, 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.
The following is a summary of the more significant existing health, safety and environmental laws and regulations to which our operations are subject.
Hazardous Substances and Waste
The United States Comprehensive Environmental Response, Compensation, and Liability Act, as amended, referred to as “ CERCLA” or the “Superfund”
law, and comparable state laws impose liability without regard to fault or the legality of the
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original conduct on certain defined persons, including current and prior owners or operators of a site where a release of hazardous substances occurred and
entities that disposed or arranged for the disposal of the hazardous substances found at the site. Under CERCLA, these “responsible persons” may be liable for
the costs of cleaning up the hazardous substances, for damages to natural resources and for the costs of certain health studies.
In the course of our operations, we occasionally generate materials that are considered “ hazardous substances ” and, as a result, may incur CERCLA
liability for cleanup costs. Also, claims may be filed for personal injury and property damage allegedly caused by the release of hazardous substances or other
pollutants. We also generate solid wastes that are subject to the requirements of the United States Resource Conservation and Recovery Act, as amended, or
“RCRA,” and comparable state statutes.
Although we use operating and disposal practices that are standard in the industry, hydrocarbons or other wastes may have been released at properties
owned or leased by us now or in the past, or at other locations where these hydrocarbons and wastes were taken for treatment or disposal. Under CERCLA,
RCRA and analogous state laws, we could be required to clean up contaminated property (including contaminated groundwater), or to perform remedial activities
to prevent future contamination.
Air Emissions
The Clean Air Act, as amended, or “CAA,” and similar state laws and regulations restrict the emission of air pollutants and also impose various monitoring
and reporting requirements. These laws and regulations may require us to obtain approvals or permits for construction, modification or operation of certain
projects or facilities and may require use of emission controls.
Global Warming and Climate Change
While we do not believe our operations raise climate change issues different from those generally raised by the commercial use of fossil fuels, legislation
or regulatory programs that restrict greenhouse gas emissions in areas where we conduct business or that would require reducing emissions from our truck fleet
could increase our costs.
Water Discharges
We operate facilities that are subject to requirements of the United States Clean Water Act, as amended, or “ CWA,” and analogous state laws for
regulating discharges of pollutants into the waters of the United States and regulating quality standards for surface waters. Among other things, these laws
impose restrictions and controls on the discharge of pollutants, including into navigable waters as well as the protection of drinking water sources. Spill
prevention, control and counter-measure requirements under the CWA require implementation of measures to help prevent the contamination of navigable waters
in the event of a hydrocarbon spill. Other requirements for the prevention of spills are established under the United States Oil Pollution Act of 1990, as amended,
or “OPA”, which amended the CWA and applies to owners and operators of vessels, including barges, offshore platforms and certain onshore facilities. Under
OPA, regulated parties are strictly liable for oil spills and must establish and maintain evidence of financial responsibility sufficient to cover liabilities related to an
oil spill for which such parties could be statutorily responsible.
State Environmental Regulations
Our operations involve the storage, handling, transport and disposal of bulk waste materials, some of which contain oil, contaminants and other regulated
substances. Various environmental laws and regulations require prevention, and where necessary, cleanup of spills and leaks of such materials and some of our
operations must obtain permits that limit the discharge of materials. Failure to comply with such environmental requirements or permits may result in fines and
penalties, remediation orders and revocation of permits.Specifically in Texas, we are subject to rules and regulations promulgated by the Texas Railroad
Commission and the Texas Commission on Environmental Quality, including those designed to protect the environment and monitor compliance with water
quality. In Louisiana, we are subject to rules and regulations promulgated by the Louisiana Department of Environmental Quality and the Louisiana Department of
Natural Resources as to environmental and water quality issues, and the Louisiana Public Service Commission as to allocation of intrastate routes and territories
for waste water transportation. We believe that we are in compliance with regulations in the states where we conduct business.
Occupational Safety and Health Act
We are subject to the requirements of the United States Occupational Safety and Health Act, as amended, or “ OSHA,” and comparable state laws that
regulate the protection of employee health and safety. OSHA’s hazard communication standard requires that information about hazardous materials used or
produced in our operations be maintained and provided to employees, state and local government authorities and citizens.
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Transportation Regulations
We may conduct interstate motor carrier (trucking) operations that are subject to federal regulation by the Federal Motor Carrier Safety Administration, or
“FMCSA,” a unit within the United States Department of Transportation, or “ USDOT.” The FMCSA publishes and enforces comprehensive trucking safety
regulations, including rules on commercial driver licensing, controlled substance testing, medical and other qualifications for drivers, equipment maintenance, and
drivers’ hours of service, referred to as “HOS.” The agency also performs certain functions relating to such matters as motor carrier registration (licensing),
insurance, and extension of credit to motor carriers’ customers. Another unit within USDOT publishes and enforces regulations regarding the transportation of
hazardous materials, or “hazmat.”
In December 2010, the FMCSA launched a program called Compliance, Safety, Accountability, or “ CSA,” in an effort to improve commercial truck and
bus safety. A component of CSA is the Safety Measurement System, or “SMS,” which analyzes all safety violations recorded by federal and state law enforcement
personnel to determine a carrier’s safety performance. The SMS is intended to allow the FMCSA to identify carriers with safety issues and intervene to address
those problems. Although our trucking operations currently hold a “Satisfactory” safety rating from FMCSA (the best rating available), the agency has announced
a future intention to revise its safety rating system by making greater use of SMS data in lieu of on-site compliance audits of carriers. We cannot predict the effect
such a revision may have on our safety rating.
Our intrastate trucking operations are also subject to various state environmental transportation regulations discussed under “ Environmental Regulations”
above. Federal law also allows states to impose insurance and safety requirements on motor carriers conducting intrastate business within their borders, and to
collect a variety of taxes and fees on an apportioned basis reflecting miles actually operated within each state.
HOS regulations establish the maximum number of hours that a commercial truck driver may work. A FMCSA rule reducing the number of hours a
commercial truck driver may work each day became effective in February 2012 and the compliance date of selected provisions was July 1, 2013. The rule, which
is intended to reduce the risk of fatigue and fatigue-related crashes and harm to driver health, prohibits a driver from driving if more than eight hours have passed
since the driver’s last off-duty or sleeper berth break of at least 30 minutes and limits the use of the restart to once a week, which, on average, will cut the
maximum work week from 82 to 70 hours. The effect of this rule on reduced driver hours may raise our operating costs.
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 drop in oil prices has decreased the spread between the price of used motor oil, feedstock and re-refining end-products.
2016 Material Events
Purchase and Sale Agreement, Churchill County, Nevada Plant
On January 28, 2016, we entered into an Asset Purchase Agreement (the “ Sale Agreement”) with Vertex Operating and its wholly-owned subsidiary,
Vertex Refining NV, LLC ("Vertex Refining NV "), Bango Oil, LLC (“ Bango Oil”)(provided that Bango Oil did not become a party to the agreement until we
exercised the Purchase Option, described below) and Safety-Kleen Systems.
Pursuant to the Sale Agreement, which closed on January 29, 2016, we (through Bango Oil after we acquired Bango Oil as described below pursuant to
our exercise of the Purchase Option) sold Safety-Kleen the used oil re-refining plant located on approximately 40 acres in Churchill County, Nevada (the “Bango
Plant”), which we previously rented, and all equipment, tools and other tangible personal property located at the Bango Plant, which relate to or are used in
connection with the operations of the Bango Plant (collectively, the “Bango Assets”). Safety-Kleen assumed certain liabilities associated with contracts assumed
in the purchase and related to bringing the Bango Plant back into operational status. The aggregate purchase price for the Bango
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Assets was $35 million, subject to adjustment as described in the Sale Agreement for certain taxes, costs and expenses incurred by Safety-Kleen after closing. A
total of $1.3 million of the purchase price was used by us in order to exercise the options we had pursuant to two Lease and Purchase Agreements (the
“Equipment Leases”) we were party to, which provided for the use of a rail facility and related equipment and a pre-fabricated metal building located at the Fallon,
Nevada, facility, and which provided us (through Vertex Refining NV) the right to acquire the applicable property/equipment subject to each Equipment Lease at
any time prior to the expiration of the leases for $914,000 and $400,000, respectively. Additionally, $100,000 of the purchase price was retained by Safety-Kleen
to acquire certain water rights necessary for operation of the Bango Plant. Finally, a required closing condition of the Sale Agreement was that we use a portion of
the purchase price to exercise the purchase option set forth in that certain Lease With Option For Membership Interest Purchase (the “Bango Lease”) entered
into on April 30, 2015, by and between us, Vertex Refining NV and Bango Oil, whereby, we had the option at any time during the term of the lease to purchase all
of the equity interests of Bango Oil (the “Purchase Option”), effectively acquiring ownership of the Bango Plant. The Purchase Option was exercised by us on
January 29, 2016 in connection with the closing of the Sale Agreement, at which time Bango Oil became a wholly-owned subsidiary of Vertex Refining NV, and
we paid approximately $9 million of consideration to Bango Oil in connection with the Purchase Option. The terms of the Bango Lease and Equipment Leases
are described in greater detail in the Current Report on Form 8-K filed by the Company with the Securities and Exchange Commission on May 5, 2015.
Additionally, an aggregate of $16 million of the purchase price paid by Safety-Kleen in connection with the Sale Agreement was required to be paid by us to our
then senior lender, Goldman Sachs Bank USA, at closing, which amount was paid at closing, and which funds were used to pay down amounts owed to Goldman
Sachs Bank USA under our Goldman Credit Agreement, as described in greater detail below under “Part II. - Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources - Credit and Guaranty Agreement with Goldman Sachs Bank USA”.
Additionally, at the closing, we placed $1.5 million in cash and $1 million worth of our common stock (1,108,928 shares, which have been returned to us
and are in the process of being canceled as of the date of this filing) into escrow with the shares to be released 12 months following the closing (which shares we
have requested be released from escrow, but have not yet received, as of the date of this filing) and the cash held in escrow to be released 18 months after the
closing, in order to satisfy any indemnification claims made by Safety-Kleen pursuant to the terms of the Sale Agreement. On June 30 and December 31 of each
year that any of our shares of common stock are in escrow, in the event the value of the shares held in escrow is less than $1 million, based on the then market
price of our common stock, we are required to increase the number of shares of common stock held in escrow to total $1 million in aggregate value. No additional
shares were required to be escrowed as of June 30, 2016 or as of December 31, 2016.
The Sale Agreement includes standard indemnification obligations of the parties, subject to certain caps on indemnification and deductibles. The closing
of the transactions contemplated by the Sale Agreement was subject to usual and customary closing conditions, including requiring that we and Safety-Kleen
enter into a Swap Agreement and Base Oil Agreement, all of which were satisfied prior to or at closing.
Houlihan Lokey acted as exclusive financial advisor to the Company in connection with the transaction.
The Company received net cash of approximately $17.3 million in connection with the transactions contemplated by the Sale Agreement, after deducting
legal, administrative and banker fees; amounts paid in connection with the exercise of the Purchase Option; cash amounts set aside in escrow; and the purchase
price of the equipment related to the Bango Plant as described above, of which $16 million was immediately paid to the Lender (defined below under “Part II -
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Credit and Guaranty
Agreement with Goldman Sachs Bank USA” ) to pay down amounts owed to Lender under the Goldman Credit Agreement (defined below under “ Part II - Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Credit and Guaranty Agreement with
Goldman Sachs Bank USA”).
Subscription Agreement
On January 29, 2016, separate from and subsequent to the closing of the transactions contemplated by the Membership Interest Purchase Agreement,
Fox Encore 05 LLC, the sole owner of Bango Oil, as seller ("Fox Encore"), entered into a Subscription Agreement with the Company whereby Fox Encore
subscribed for and purchased 44,000 shares of newly-designated Series C Preferred Stock in consideration for $4 million. The 44,000 shares of Series C
Preferred Stock are convertible into 4,400,000 shares of the Company’s common stock subject to the terms of a Certificate of Designation of the Series C
Preferred Stock. On August 2, 2016, Fox Encore converted 12,432 shares of Series C Preferred Stock into 1,243,200 shares of the Company's common stock.
$5.15 Million Promissory Note
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On January 29, 2016, following the closing of, and separate from the transactions contemplated by, the Membership Interest Purchase Agreement,
Vertex OH, borrowed $5.15 million from Fox Encore and provided a Promissory Note to Fox Encore to reflect such borrowed funds (the “Fox Note”), as described
in greater detail below under “Part II. - Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital
Resources - Fox Note”.
May 2016 Unit Offering
On May 13, 2016, we closed the transactions contemplated by the May 10, 2016 Unit Purchase Agreement (the “ May 2016 Purchase Agreement”)
entered into with certain accredited investors (the “May 2016 Investors”), pursuant to which we sold to the May 2016 Investors an aggregate of 12,403,683 units
(the “May 2016 Units”), each consisting of (i) one share of Series B1 Preferred Stock of the Company, $0.001 par value per share (the “ Series B1 Preferred
Stock”) and (ii) one warrant to purchase one-quarter of a share of common stock of the Company, $0.001 par value per share, totaling an aggregate of warrants
to purchase 3,100,926 shares of common stock (each a “May 2016 Warrant” and collectively, the “May 2016 Warrants”). The May 2016 Purchase Agreement and
related transactions are described in greater detail below under “Part II. - Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources - Unit Offerings”.
Amended and Restated Credit and Guaranty Agreement
On January 29, 2016, we, Vertex Operating, certain of our other subsidiaries, Goldman Sachs Specialty Lending Holdings, Inc., as lender (“ Lender”) and
Goldman Sachs Bank USA, a New York State-Chartered Bank, as Administrative Agent, Lead Arranger and Collateral Agent (“Agent”) entered into an Amended
and Restated Credit and Guaranty Agreement (the “Restated Credit Agreement ”), which amended and restated that certain $40 million Credit and Guaranty
Agreement entered into between the parties on May 2, 2014 (as amended and modified to date, the “Goldman Credit Agreement ”). The Restated Credit
Agreement is described in greater detail below under “Part II. - Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources - Credit and Guaranty Agreement with Goldman Sachs Bank USA”.
Amendment No. 1 to Amended and Restated Credit and Guaranty Agreement
On May 9, 2016, we entered into Amendment No. 1 to the Amended and Restated Credit Agreement (“ Amendment No. 1 ”), which amended the Restated
Credit Agreement as described in greater detail below under “Part II. - Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources - Credit and Guaranty Agreement with Goldman Sachs Bank USA - Amendment No. 1 to Amended and Restated
Credit”.
Vertex Recovery Management LA, LLC
On May 25, 2016, Vertex Recovery Management, LLC, our wholly-owned subsidiary (“ VRM”) and Industrial Pipe, Inc. (“ Industrial Pipe”), formed a joint
venture Louisiana limited liability company, Vertex Recovery Management LA, LLC (“VRMLA”). VRM owns 51% and Industrial Pipe owns 49% of VRMLA. VRMLA
is currently buying and preparing ferrous and non-ferrous scrap intended for large haul barge sales. We consolidated 100% of VRMLA’s operating loss of $22,844
for the nine months ended September 30, 2016 and then added the 49% or $11,193 loss attributable to the non-controlling interest back to the Company’s “Net
income (loss) attributable to Vertex Energy, Inc.” in the Balance Sheet.
On June 5, 2016, we and Penthol C.V. (“ Penthol”) of the Netherlands aka Penthol LLC (a Penthol subsidiary in the United States) reached an agreement
for us to act as Penthol’s exclusive agent to provide marketing, sales, and logistical duties of Group III base oil from the United Arab Emirates to the United
States. The start-up date was July 25, 2016, the agreement has a 5 year term through 2021, and the product will ship via truck, rail and barge.
Subsequent Events:
Credit and Guaranty Agreement
Effective February 1, 2017, we, Vertex Operating and substantially all of Vertex Energy’s other operating subsidiaries, other than E-Source, entered into
a $20 million Credit Agreement with Encina Business Credit, LLC as agent and Encina Business Credit SPV, LLC and CrowdOut Capital LLC as lenders
thereunder, as described in greater detail below under “Part II. - Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources - Credit and Guaranty Agreement and Revolving Credit Facility with Encina Business Credit, LLC”.
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Revolving Credit Facility with Encina Business Credit, LLC
Effective February 1, 2017, we, Vertex Operating and substantially all of Vertex Energy’s other operating subsidiaries, other than E-Source, entered into
a $10 million Revolving Credit Agreement with Encina Business Credit SPV, LLC as lender and Encina Business Credit, LLC as administrative agent, as
described in greater detail below under “Part II. - Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources - Credit and Guaranty Agreement and Revolving Credit Facility with Encina Business Credit, LLC” (collectively, the February 1, 2017 Credit
Agreement and Revolving Credit Agreement as referred to herein as the “Credit Agreements”).
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 two patents registered with the U.S. Patent and Trademark Office relating to our TCEP technology:
“System For Making A Usable Hydrocarbon Product From Used Oil” (#8,613,838), which was granted on December 24, 2013; and
“Method for Making a Usable Hydrocarbon Product From Used Oil ” (#8,398,847), which was granted on March 19, 2013.
We also have three patents registered with the U.S. Patent and Trademark Office relating to our base oil and VGO technology:
“Used Lubricating Oil Reclaiming” (#5,306,419), which was granted on April 26, 1994; and
“Reconstituting Lubricating Oil” (#5,447,628), which was granted on September 5, 1995; and
“Performance Grade Asphalt and Methods” (#6,203,606), which was granted on March 20, 2001.
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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.
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.
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RISKS RELATING TO OUR OUTSTANDING CREDIT FACILITIES,
DEBT AND RECEIVABLES
We will need to raise additional capital to meet the requirements of the terms and conditions of our Credit Agreements and to fund future
acquisitions and our ability to obtain the necessary funding is uncertain.
We will need to raise additional funding to meet the requirements of the terms and conditions of our Credit Agreements. Additionally, we may need to
raise additional funds through public or private debt or equity financing, via the sale of assets or through other various means to fund our obligations, or acquire
assets and businesses in the future. In such a case, adequate funds may not be available when needed or may not be available on favorable terms. If we need
to raise additional funds in the future, by issuing equity securities, dilution to existing stockholders will result, and such securities may have rights, preferences and
privileges senior to those of our common stock. If funding is insufficient at any time in the future and we are unable to generate sufficient revenue from new
business arrangements, to complete planned acquisitions or operations, our results of operations and the value of our securities could be adversely affected.
Future funding may not be available on favorable terms, if at all.
We may not be able to generate sufficient cash flow to meet our debt service and other obligations due to events beyond our control.
Our ability to generate cash flows from operations, to make scheduled payments on or refinance our indebtedness and to fund working capital needs and
planned capital expenditures will depend on our future financial performance and our ability to generate cash in the future. Our future financial performance will be
affected by a range of economic, financial, competitive, business and other factors that we cannot control, such as general economic, legislative, regulatory and
financial conditions in our industry, the economy generally, the price of oil and other risks described below. A significant reduction in operating cash flows
resulting from changes in economic, legislative or regulatory conditions, increased competition or other events beyond our control could increase the need for
additional or alternative sources of liquidity and could have a material adverse effect on our business, financial condition, results of operations, prospects and our
ability to service our debt and other obligations. If we are unable to service our indebtedness or to fund our other liquidity needs, we may be forced to adopt an
alternative strategy that may include actions such as reducing or delaying capital expenditures, selling assets, restructuring or refinancing our indebtedness,
seeking additional capital, or any combination of the foregoing. If we raise additional debt, it would increase our interest expense, leverage and our operating and
financial costs. We cannot assure you that any of these alternative strategies could be affected on satisfactory terms, if at all, or that they would yield sufficient
funds to make required payments on our indebtedness or to fund our other liquidity needs. Reducing or delaying capital expenditures or selling assets could
delay future cash flows. In addition, the terms of existing or future debt agreements may restrict us from adopting any of these alternatives. We cannot assure you
that our business will generate sufficient cash flows from operations or that future borrowings will be available in an amount sufficient to enable us to pay our
indebtedness or to fund our other liquidity needs.
If for any reason we are unable to meet our debt service and repayment obligations, we would be in default under the terms of the agreements governing
our indebtedness, which would allow our creditors at that time to declare all of our outstanding indebtedness to be due and payable. This would likely in turn
trigger cross-acceleration or cross-default rights between our applicable debt agreements. Under these circumstances, our lenders could compel us to apply all of
our available cash to repay our borrowings. In addition, the lenders under our credit facilities or other secured indebtedness could seek to foreclose on our assets
that are their collateral. If the amounts outstanding under our indebtedness were to be accelerated, or were the subject of foreclosure actions, our assets may not
be sufficient to repay in full the money owed to the lenders or to our other debt holders.
Uncertainty and illiquidity in credit and capital markets can impair our ability to obtain credit and financing on acceptable terms and can
adversely affect the financial strength of our business partners.
Our ability to obtain credit and capital depends in large measure on the state of the credit and capital markets, which is beyond our control. Our ability to
access credit and capital markets may be restricted at a time when we would like, or need, access to those markets, which could constrain our flexibility to react
to changing economic and business conditions. In addition, the cost and availability of debt and equity financing may be adversely impacted by unstable or illiquid
market conditions. Protracted uncertainty and illiquidity in these markets also could have an adverse impact on our lenders, commodity hedging counterparties, or
our customers, preventing them from meeting their obligations to us.
From time to time, our cash needs may exceed our internally generated cash flow, and our business could be materially and adversely affected if we are
unable to obtain necessary funds from financing activities. From time to time, we may need to supplement cash generated from operations with proceeds from
financing activities. Uncertainty and illiquidity in financial markets may materially impact the ability of the participating financial institutions to fund their
commitments to us under our liquidity
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facilities. Accordingly, we may not be able to obtain the full amount of the funds available under our liquidity facilities to satisfy our cash requirements, and our
failure to do so could have a material adverse effect on our operations and financial position.
We have substantial indebtedness which could adversely affect our financial flexibility and our competitive position. Our debt agreements
have previously been declared in default, and our future failure to comply with financial covenants in our debt agreements could result in such debt
agreements again being declared in default.
We have a significant amount of outstanding indebtedness. As of December 31, 2016, we owed approximately $9.4 million in accounts payable and
accrued expenses. As of December 31, 2016, we owed $4 million under the Restated Goldman Credit Agreement, MidCap Loan Agreement (described in greater
detail below under “Part II. - Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources -
MidCap Loan Agreement”), and Fox Note, provided that as disclosed below under “ Part II. - Item 7. Management’s Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources - Credit and Guaranty Agreement and Revolving Credit Facility with Encina Business Credit, LLC”, in
February 2017, we borrowed certain funds under the Credit Agreements and paid off such debts owed under the Restated Goldman Credit Agreement, MidCap
Loan Agreement and Fox Note in full. Notwithstanding such repayments, as of the date of this filing we owe $11,925,000 under the EBC Credit Agreement and
$2,184,786 under the Revolving Credit Agreement (each defined and described below under “Part II. - Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources - Credit and Guaranty Agreement and Revolving Credit Facility with Encina Business
Credit, LLC”), and are further required to redeem all outstanding Series B Preferred Stock and Series B1 Preferred Stock (which currently has a liquidation and
redemption value of $29.5 million) on June 24, 2020.
Our substantial indebtedness could have important consequences and significant effects on our business. For example, it could:
increase our vulnerability to adverse changes in general economic, industry and competitive conditions;
require us to dedicate a substantial portion of our cash flow from operations to make payments on our indebtedness, thereby reducing the availability of
our cash flow to fund working capital, capital expenditures and other general corporate purposes;
restrict us from taking advantage of business opportunities;
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• make it more difficult to satisfy our financial obligations;
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place us at a competitive disadvantage compared to our competitors that have less debt obligations; and
limit our ability to borrow additional funds for working capital, capital expenditures, acquisitions, debt service requirements, execution of our business
strategy or other general corporate purposes on satisfactory terms or at all.
We may need to raise additional funding in the future to repay or refinance the Credit Agreements 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. Furthermore, the fact that our prior credit agreements have previously been declared in
default may negatively affect the perception of the Company and our ability to pay our debts as they become due in the future and could result in the price of our
securities declining in value or being valued at lower levels than companies with similar histories of defaults.
The covenants in our credit and loan agreements restrict our ability to operate our business and might lead to a default under our credit
agreements.
Our debt agreements limit, among other things, our ability to:
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incur or guarantee additional indebtedness;
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•
create liens;
• make payments to junior creditors;
• make investments;
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sell material assets;
affect fundamental changes in our structure;
• make certain acquisitions;
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sell interests in our subsidiaries;
consolidate or merge with or into other companies or transfer all or substantially all of our assets; and
engage in transactions with affiliates.
The Credit Agreements contain customary representations, warranties and requirements for the Company to indemnify the lenders and their affiliates.
The Credit Agreements also include various covenants (positive and negative) binding upon the Company, including, prohibiting us from undertaking acquisitions
or dispositions unless they meet the criteria set forth in the Credit Agreements, not incurring any capital expenditures in amount exceeding $3 million in any fiscal
year that the Credit Agreements are in place, and requiring us to maintain at least $2.5 million of average borrowing availability under the Revolving Credit
Agreement in any 30 day period.
As a result of these covenants and limitations, we may not be able to respond to changes in business and economic conditions and to obtain additional
financing, if needed, and we may be prevented from engaging in transactions that might otherwise be beneficial to us. Our credit and loan agreements require,
and our future credit facilities and loan agreements may require, us to maintain certain financial ratios and satisfy certain other financial condition tests. Our ability
to meet these financial ratios and tests can be affected by events beyond our control, and we may not be able to meet those tests. The breach of any of these
covenants could result in a default under our credit agreements or future credit facilities. Upon the occurrence of an event of default, the lenders could elect to
declare all amounts outstanding under such credit agreements, including accrued interest or other obligations, to be immediately due and payable. If amounts
outstanding under such credit agreements were to be accelerated, our assets might not be sufficient to repay in full that indebtedness and our other
indebtedness.
Our credit agreements and loan agreements also contain cross-default and cross-acceleration provisions. Under these provisions, a default or
acceleration under one instrument governing our debt may constitute a default under our other debt instruments that contain cross-default and cross-acceleration
provisions, which could result in the related debt and the debt issued under such other instruments becoming immediately due and payable. In such event, we
would need to raise funds from alternative sources, which funds might not be available to us on favorable terms, on a timely basis or at all. Alternatively, such a
default could require us to sell assets and otherwise curtail operations to pay our creditors. The proceeds of such a sale of assets, or curtailment of operations,
might not enable us to pay all of our liabilities.
Our ability to service our indebtedness will depend on our ability to generate cash in the future.
Our ability to make payments on our indebtedness will depend on our ability to generate cash in the future. Our ability to generate cash is subject to
general economic and market conditions and financial, competitive, legislative, regulatory and other factors that are beyond our control. Our business may not
generate sufficient cash to fund our working capital requirements, capital expenditure, debt service and other liquidity needs, which could result in our inability to
comply with financial and other covenants contained in our debt agreements, our being unable to repay or pay interest on our indebtedness, and our inability to
fund our other liquidity needs. If we are unable to service our debt obligations, fund our other liquidity needs and maintain compliance with our financial and other
covenants, we could be forced to curtail our operations, our creditors could accelerate our indebtedness and exercise other remedies and we could be required to
pursue one or more alternative strategies, such as selling assets or refinancing or restructuring our indebtedness. However, such alternatives may not be
feasible or adequate.
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Our failure to comply with the covenants in the documents governing our existing and future indebtedness could materially adversely affect our
financial condition and liquidity.
In connection with the Credit Agreements, we agreed to comply with certain affirmative and negative covenants and agreed to meet certain financial
covenants (described in greater detail above under “The covenants in our credit and loan agreements restrict our ability to operate our business and might lead to
a default under our credit agreements”).
The Credit Agreements include customary events of default for facilities of a similar nature and size as the Credit Agreements, including if an event of
default occurs under any agreement evidencing $500,000 or more of indebtedness of the Company; we fail to make any payment when due under any material
agreement; subject to certain exceptions, any judgment is entered against the Company in an amount exceeding $500,000; and also provides that an event of
default occurs if a change in control of the Company occurs, which includes if (a) Benjamin P. Cowart, the Company’s Chief Executive Officer, Chairman of the
Board and largest shareholder and Chris Carlson, the Chief Financial Officer of the Company, cease to own and control legally and beneficially, collectively, either
directly or indirectly, equity securities in Vertex Energy, Inc., representing more than 15% of the combined voting power of all securities entitled to vote for
members of the board of directors or equivalent on a fully-diluted basis, (b) the acquisition of ownership, directly or indirectly, beneficially or of record, by any
person or group of securities representing more than 30% of the aggregate ordinary voting power represented by the issued and outstanding securities of Vertex
Energy, Inc., or (c) during any period of 12 consecutive months, a majority of the members of the board of directors of the Company cease to be composed of
individuals (i) who were members of that board or equivalent governing body on the first day of such period, (ii) whose election or nomination to that board or
equivalent governing body was approved by individuals referred to in clause (i) above constituting at the time of such election or nomination at least a majority of
that board or equivalent governing body or (iii) whose election or nomination to that board or other equivalent governing body was approved by individuals
referred to in clauses (i) and (ii) above constituting at the time of such election or nomination at least a majority of that board or equivalent governing body.
A breach of any of the covenants of the Credit Agreements or any 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 and/or enforce their security
interests over substantially all of our assets. 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 may not 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 and/or cause our lenders to enforce their security
interests which could ultimately result in the foreclosure of our assets, which would have a material adverse effect on our operations and the value of our
securities.
Our obligations under the Credit Agreements are secured by a first priority security interest in substantially all of our assets.
Our obligations under the Credit Agreements are secured by a first priority security interest in substantially all of our assets. Additionally, substantially all
of our subsidiaries agreed to guarantee our obligations under the Credit Agreements. As such, our creditors may enforce their security interests over our assets
and/or our subsidiaries which secure the repayment of such obligations, take control of our assets and operations, force us to seek bankruptcy protection, or force
us to curtail or abandon our current business plans and operations. If that were to happen, any investment in the Company 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 Agreements. 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 or any future facility, we may be forced to curtail or abandon our current and/or future planned business operations.
RISKS RELATING TO OUR OPERATIONS, BUSINESS AND INDUSTRY
General Risks
The price of oil and fluctuations in oil prices may have a negative effect on our results of operations.
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The majority of our operations are associated with collecting used oil, re-refining or otherwise processing a portion of such used oil and then selling both
such re-refined/processed oil and the excess feedstock oil which we do not currently have the capacity to re-refine, to other customers. The prices at which we
sell our re-refined/processed oil and extra feedstock are affected by changes in the reported spot market prices of oil. If applicable rates increase or decrease, we
typically will charge a higher or lower corresponding price for our re-refined/processed oil and excess feedstock. The price at which we sell our re-
refined/processed oil and excess feedstock is affected by changes in certain indices measuring changes in the price of heavy fuel oil, with increases and
decreases in the indices typically translating into a higher or lower price for our re-refined/processed oil and excess feedstock. The cost to collect used oil,
including the amounts we pay to obtain a portion of our used oil and therefore ability to collect necessary volumes as well as the fuel costs of our oil collection
fleet, typically also increases or decreases when the relevant indices increase or decrease. However, even though the prices we can charge for our re-
refined/processed oil and excess feedstock and the costs to collect and re-refine/processed used oil typically increase and decrease together, there is no
assurance that when our costs to collect and re-refine/process used oil increase we will be able to increase the prices we charge for our re-refined/processed oil
excess feedstock to cover such increased costs, or that our costs to collect and re-refine/process used oil will decline when the prices we can charge for re-
refined/processed oil declines. These risks are exacerbated when there are rapid fluctuations in these oil indices.
In addition to the above, the value of re-refined and processed used oil is usually greater the more expensive oil is. As the price of oil decreases so does
the spread between re-refined/processed used oil and refined oil and extremely low oil prices, such as the global markets have experienced during fiscal 2015 and
2016, customers will often be willing to pay the slightly higher cost of refined oil rather than paying for re-refined/processed oil. Furthermore, as the price of oil
decreases, the price we can charge for re-refined/processed oil decreases, and while in general the cost of our feedstocks decrease, the fixed prices required to
process such feedstock and operate our plans remain fixed. As such, in the event the price of oil remains low and we are not able to increase the prices we
charge for re-refined/processed oil, our margins will likely decrease and it may not become economically feasible to continue to operate our facilities. In the event
that were to occur we may be forced to shut down our facilities.
The occurrence of any of the events described above could have a material adverse effect on our results of operations and could in turn cause the value
of our securities to decline in value.
The prices of many of our products are subject to significant volatility.
Our principal products include marine fuel cutterstock and a higher-value feedstock for further processing, vacuum oil gas, base oil that is sold to lubricant
packagers and distributors, pygas, gasoline blendstock and marine fuel cutterstock. The prices of these products are tied to the value of oil. Accordingly, our
results of operations will be affected by fluctuations in the prevailing market price for oil. Historically, market prices for oil have fluctuated in response to a number
of factors, including global changes in supply and demand resulting from changes in local and global economic conditions, changes in energy policies of U.S. and
foreign governments, changes in international trading policies, OPEC, and other factors. While we seek to mitigate the risks associated with price declines,
including in some situations, by using hedging, a significant decrease in the market price of any of our products or of oil would have a material adverse effect on
our results of operations and cash flow. Furthermore, rapid and material changes in feedstock prices generally have an immediate and, often times, material
impact on the Company’s gross margin and profitability resulting from the lag effect or lapse of time from the procurement of the feedstock until they are re-
refined/processed and the finished products are sold. Our results of operations could be materially and adversely affected in the future by this volatility.
Our TCEP only makes commercial sense when the market price for oil is high.
We are currently utilizing TCEP to pre-treat our used motor oil feedstocks prior to shipping them to our facility at Marrero. We have not operated our TCEP
for the purpose of producing finished cutterstock since the third quarter of fiscal 2015. As the price of oil decreased sharply in fiscal 2015 and 2016, we
determined that it did not make economic sense to run our TCEP, which generates the greatest margins when oil prices are high. When oil prices are low, like
they are currently, the fixed costs of TCEP are greater than the price we can charge for re-refined oil we can create using such technology. In the event oil prices
remain low, moving forward we anticipate not operating TCEP, nor do we anticipate generating any revenues through the use of such technology and processes.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Downturns and volatility in global economies and commodity and credit markets could materially adversely affect our business, results of
operations and financial condition.
Our results of operations are materially affected by the conditions of the global economies and the credit, commodities and stock markets. Among other
things, we may be adversely impacted if our customers and suppliers are not able to access sufficient capital to continue to operate their businesses or to
operate them at prior levels. A decline in consumer confidence or changing patterns in the availability and use of disposable income by consumers can negatively
affect both our suppliers and customers. Declining discretionary consumer spending or the loss or impairment of a meaningful number of our suppliers or
customers could lead to a dislocation in either feedstock availability or customer demand. Any tightening in credit supply could negatively affect our customers’
ability to pay for our products on a timely basis or at all and could result in a requirement for additional bad debt reserves. Although many of our customer
contracts are formula-based, continued volatility in the oil market could negatively impact our revenues and overall profits. Counterparty risk on finished product
sales can also impact revenue and operating profits when customers either are unable to obtain credit or refuse to take delivery of finished products due to market
price declines.
If we are unable to retain current, and attain new, customers our revenue and cash flows could be reduced to levels that could adversely affect
our results of operations.
Any of the following factors:
•
•
•
•
a material decrease in the supply or price of crude oil or petroleum related products in which we deal;
a material decrease in demand for the finished products in the markets we serve;
scheduled refinery turnarounds or unscheduled maintenance; and
operational problems or catastrophic events at any of our facilities,
could result in our inability to maintain current customers or attain new customers. If that were to happen our results of operations could be materially
adversely affected and the value of our securities could decline in value.
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 they may not 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.
We are dependent on third party generators and collectors for our feedstock.
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 400 used oil collectors in the United States.
We depend on generators to generate used oil feedstock and collectors to collect such feedstock. In the event a significant number of generators cease
generating feedstock, or generators and collectors cease providing us their feedstock or otherwise materially change the current process by which feedstock is
collected, it could have a material adverse effect on our business, financial condition or results of operations.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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.
Our operating margins and profitability may be negatively impacted by changes in fuel and energy costs.
We transport our feedstock, refined oil and re-refined oil, VGO and other materials 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, VGO and other materials 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, if the costs to collect, refine
and re-refine used oil and petrochemical products increase in the future, we may not be able to increase the prices we charge for our refined and re-refined
products to cover such increased costs. Additionally, the costs to collect, refine and re-refine used oil and petrochemical products may not decline if the prices we
can charge for our products decline. 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.
We are vulnerable to the potential difficulties associated with rapid growth.
We believe that our future success depends on our ability to manage the rapid growth that we have experienced, and the continued growth that we expect
to experience organically and through acquisitions. Our growth places additional demands and responsibilities on our management to, among other things,
maintain existing suppliers and customers and attract, recruit, retain and effectively manage employees, as well as expand operations. The following factors could
present difficulties to us: lack of sufficient executive-level personnel and increased administrative burden; availability of suitable acquisition candidates, trucks,
barges, tanks, rail cars and processing facilities; and the ability to provide focused service attention to our customers, among others.
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, feedstock sale
agreements, a few key relationships in the bunkering, blending and No. 6 oil industry, and other relationships. 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
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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 19%, 11%, 9% and 8% of our revenues for the year ended December 31, 2016, and four
companies represented approximately 24%, 15%, 8%, and 2% of our revenues for the year ended December 31, 2015. 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.
A significant portion of our historical revenues are a result of our agreement with KMTEX.
We have 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 currently expires on December 31, 2018, provided that if not terminated by either party by written notice to the other,
received within ninety (90) days prior to the expiration of the initial term or any extension term, the agreement automatically renews for up to six additional one (1)
year periods. However, either party can terminate the agreement at any time with ninety days prior written notice for any reason and with thirty days written notice
upon the occurrence of certain material termination events as described in greater detail in the agreement. 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 may not be able to effectively compete with these other companies and competitive pressures, including possible
downward pressure on the prices we charge for our products and services, may 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 and/or increases in the cost 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. Additionally, we depend on the price of such raw
materials, including feedstock being reasonable to us in relation to the prices we are able to receive for our final products. 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 plants 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.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Unanticipated problems at, or downtime effecting, our facilities and those operated by third parties on which we rely, could have a material
adverse effect on our results of operations.
Our ability to process feedstocks depends on our ability to operate our refining/processing operations and facilities, and those operated by third parties on
which we rely, including, but not limited to KMTEX, and the total time that such facilities are online and operational. The occurrence of significant unforeseen
conditions or events in connection with the operation or maintenance of such facilities, such as the need to refurbish such facilities, shortages of workers or
materials, adverse weather, including, but not limited to lightning strikes, floods, hurricanes, tornadoes, earthquakes, equipment failures, fires, explosions, oil or
other leaks, damage to or destruction of property and equipment associated therewith, environmental releases and/or damage, government regulation changes
affecting the use of such facilities, terrorist attacks, mechanical or physical failures of equipment, acts of God, or other conditions or events, could prevent us from
operating our facilities, or prevent such third parties from operating their facilities, or could force us or such third parties to shut such facilities down for repairs,
maintenance, refurbishment or upgrades for a significant period of time. In the event any of our facilities or those of third parties on which we rely are offline for an
extended period of time it could have a material adverse effect on our results of operations and consequently the price of our securities.
The fees charged to customers under our agreements with them may not escalate sufficiently to cover increases in costs and the agreements
may be suspended in some circumstances, which would affect our profitability.
Under our agreements with our customers, we may be unable to increase the fees that we charge our customers at a rate sufficient to offset any
increases in our costs. Additionally, some customers’ obligations under their agreements with us may be permanently or temporarily reduced upon the
occurrence of certain events, some of which are beyond our control, including force majeure events. Force majeure events may include (but are not limited to)
events such as revolutions, wars, acts of enemies, embargoes, import or export restrictions, strikes, lockouts, fires, storms, floods, acts of God, explosions,
mechanical or physical failures of our equipment or facilities of our customers. If the escalation of fees is insufficient to cover increased costs or if any customer
suspends or terminates its contracts with us, our profitability could be materially and adversely affected.
Improvements in or new discoveries of alternative energy technologies could have a material adverse effect on our financial condition and
results of operations.
Because our business depends on the demand for oil and used oil, any improvement in or new discoveries of alternative energy technologies (such as
wind, solar, geothermal, fuel cells and biofuels) that increase the use of alternative forms of energy and reduce the demand for oil, used oil and oil and used oil
related products could have a material adverse impact on our business, financial condition and results of operations.
Improvements in or new methodologies or technology relating to the refining and re-refining of used oil feedstocks could have a material
adverse effect on our financial condition and results of operations.
In the event our competitors or future competitors design or implement new methodologies or new technology relating to the refining or re-refining of used
oil feedstock it could reduce demand for our processes, or make such processes commercially irrelevant. In the event we are not able to duplicate or license such
new methodologies or technology it could have a material adverse impact on our business, financial condition and results of operations.
Our business is subject to operational and safety risks, including the risk of personal injury to employees and others.
Our operations involve risks such as truck accidents, equipment defects, malfunctions and failures. Additionally, our operations are subject to risk
associated with releases of oil and other materials. Operation of our facilities involves additional risks of fire and explosion. Any of these risks could potentially
result in injury or death of employees and others, a need to shut down or reduce operation of facilities, increased operating expense and exposure to liability for
pollution and other environmental damage, and property damage or destruction.
While we seek to minimize our exposure to such risks through comprehensive training, compliance and response and recovery programs, as well as
vehicle and equipment maintenance programs, if we were to incur substantial liabilities in excess of any applicable insurance, our business, results of operations
and financial condition could be adversely affected. Any such incidents could also tarnish our reputation and reduce the value of our brand. Additionally, a major
operational failure, even if suffered by a competitor, may bring enhanced scrutiny and regulation of our industry, with a corresponding increase in operating
expense.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
We may be subject to citizen opposition and negative publicity due to public concerns over our operations and planned future 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 pursuant to an employment contract which continues in effect until December 31, 2018, provided that the agreement automatically extends for additional
one year terms thereafter in the event neither party provides the other at least 60 days prior notice of their intention not to renew the terms of the agreement. 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 our re-refining facilities and operate our existing refining
operations and facilities. 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 future re-refining facilities.
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.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Disruptions to infrastructure and our and our partner’s facilities could materially and adversely affect 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 our terminal facility located at Cedar
Marine Terminal in Baytown, Texas 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 also experienced a fire at our Heartland facility in February 2016, which took the facility offline for repairs for a period of time. Any
prolonged period during which the facilities we operate or acquire are non-operational or operational on a limited basis due to the decision to refurbish or upgrade
such facilities, due to accidents or events which occur at such facilities, including, but not limited to fires, floods or other acts of God, or any other reason,
including problems with the facilities, could adversely affect our revenues and results of operations. Furthermore, any period during which KMTEX’s facilities or
our other 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 currently have five registered patents in the United
States (none, internationally). If we file additional patent applications for our technologies in the future, such patents may not be granted and the scope of any
claims granted in any patent may not provide us with proprietary protection or a competitive advantage. Furthermore, our current patents, or future patents, if
granted, may not be valid and may not 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. A license may not be available to us, if at all, upon terms and conditions
acceptable to us and we may not prevail in any intellectual property litigation. Intellectual property litigation is costly and time consuming, and we may not 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.
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,
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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 affect 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 certain 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. Currently TCEP is not
producing product because the total revenues and gross profit margins are below the Company's expectations.
Additionally, the costs moving forward of enhancing and updating and/or replicating our technology or creating new 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,
replicate our technology, or create new technologies 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 these potential future 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.
Our operations would be negatively affected if we are unable to use our facilities in the future.
If we were not able to use any one or more of our facilities moving forward, our ability to generate revenue and compete in the marketplace would be
negatively affected. If we are unable to use our facilities for any reason, we will not be able to effectively generate revenue or compete with additional
technologies brought to market by our competitors, the volume of our finished products, would decline and 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.
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Our business is subject to local, legal, political, and economic factors which are beyond our control.
We believe that the current political environment for refining and re-refining facilities is sufficiently supportive to enable us to continue to operate our
facilities and in the future plan and implement the construction of additional facilities; 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 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 implemented and are implementing various security measures, including checkpoints and travel restrictions on large trucks. Although many companies
are adversely affected by slowdowns 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 processes at full
capacity, or may incur increased expenses to do so. These measures may significantly increase our costs and reduce our operating margins and income.
Our business is geographically concentrated and is therefore subject to regional economic downturns.
Our operations and customers are concentrated principally in the Gulf Coast,upper Midwest, and Mid-Atlantic. 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.
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.
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Claims above our insurance limits, or significant increases in our insurance premiums, may reduce our profitability.
We currently employ 58 full-time drivers. From time to time, some of these employee drivers are involved in automobile accidents. We currently carry
liability insurance of $1,000,000 for our drivers, subject to applicable deductibles, and carry umbrella coverage up to $25,000,000. We currently employ over 200
employees. Claims against us may exceed the amounts of available insurance coverage. If we were to experience a material increase in the frequency or
severity of accidents, liability claims or workers’ compensation claims or unfavorable resolutions of claims, our operating results could be materially affected.
Litigation related to personal injury from the operation of our business may result in significant liabilities and limit our profitability.
The hazards and risks associated with the transport, storage, and handling, treatment and disposal of used oil and other hydrocarbon products (such as
fires, spills, explosions and accidents) may expose us to personal injury claims, property damage claims and/or products liability claims from our employees,
customers or third parties. As protection against such claims and operating hazards, we maintain insurance coverage against some, but not all, potential losses.
However, we may sustain losses for uninsurable or uninsured risks, or in amounts in excess of existing insurance coverage. Due to the unpredictable nature of
personal injury litigation, it is not possible to predict the ultimate outcome of any future claims or lawsuits, and we may be held liable for significant personal injury
or damage to property or third parties, or other losses, that are not fully covered by our insurance, which could have a material adverse effect on our financial
condition, results of operations and cash flows.
The litigation environment in which we operate poses a significant risk to our businesses.
We may be involved from time to time in the ordinary course of business in lawsuits involving employment, commercial, and environmental issues, other
claims for injuries and damages, and shareholder and class action litigation, among other matters. We may experience negative outcomes in such lawsuits in the
future. Any such negative outcomes could have a material adverse effect on our business, liquidity, financial condition and results of operations. We evaluate
litigation claims and legal proceedings to assess the likelihood of unfavorable outcomes and to estimate, if possible, the amount of potential losses. Based on
these assessments and estimates, we establish reserves and disclose the relevant litigation claims or legal proceedings, as appropriate. These assessments and
estimates are based on the information available to management at the time and involve a significant amount of judgment. Actual outcomes or losses may differ
materially from such assessments and estimates. The settlement or resolution of such claims or proceedings may have a material adverse effect on our results of
operations. In addition, judges and juries in certain jurisdictions in which we conduct business have demonstrated a willingness to grant large verdicts, including
punitive damages, to plaintiffs in personal injury, property damage and other tort cases. We use appropriate means to contest litigation threatened or filed against
us, but the litigation environment in these areas poses a significant business risk to us and could cause a significant diversion of management resources and
could have a material adverse effect on our financial condition, results of operations and cash flows.
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.
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 may not be able to continue to do so in the future. A significant increase in our fuel or other
transportation costs could lower our operating margins and negatively impact our profitability.
Our hedging activities may prevent us from benefiting fully from increases in oil prices and may expose us to other risks, including
counterparty risk.
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We use derivative instruments to hedge the impact of fluctuations in oil prices on our results of operations and cash flows. To the extent that we engage in
hedging activities to protect ourselves against commodity price declines, we may be prevented from fully realizing the benefits of increases in oil prices above the
prices established by our hedging contracts. In addition, our hedging activities may expose us to the risk of financial loss in certain circumstances, including
instances in which the counterparties to our hedging contracts fail to perform under the contracts. Finally, we are subject to risks associated with the adoption of
derivatives legislation and regulations (including under the Dodd-Frank Wall Street Reform and Consumer Protection Act) related to derivative contracts which if
adopted, could have an adverse impact on our ability to hedge risks associated with our business. If regulations adopted in the future require that we post margin
for our hedging activities or require our counterparties to hold margin or maintain capital levels, the cost of which could be passed through to us, or impose other
requirements that are more burdensome than current regulations, hedging transactions in the future would become more expensive than we experienced in the
past.
Competitors that produce their own supply of feedstocks, have more extensive retail outlets, or have greater financial resources may have a
competitive advantage.
The refining and re-refining industries are highly competitive with respect to both feedstock supply and refined/re-refined product markets. We compete
with many companies for available supplies of feedstocks and for outlets for our products. We do not produce any of our feedstocks. Some of our competitors,
however, obtain a portion of their feedstocks from their own production and some have more extensive retail outlets than we have. Competitors that have their
own production or extensive retail outlets (and greater brand-name recognition) are at times able to offset losses from their operations with profits from producing
or retailing operations, and may be better positioned to withstand periods of depressed margins or feedstock shortages.
Some of our competitors also have materially greater financial and other resources than we have. Such competitors have a greater ability to bear the
economic risks inherent in all phases of our business. In addition, we compete with other industries that provide alternative means to satisfy the energy and fuel
requirements of our industrial, commercial and individual customers.
Risks Relating to Accounting and Internal Controls
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 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, and has in the past, revealed 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.
We have reported material weaknesses in the effectiveness of our internal controls over financial reporting, and if we cannot maintain
effective internal controls or provide reliable financial and other information in the future, investors may lose confidence in our SEC reports.
We are reporting a material weakness in the effectiveness of our internal controls over financial reporting in this report, as described below under " Part II"-
"Item 9A. Controls and Procedures". Specially, we identified the following material weakness in our internal control over financial reporting as of December 31,
2016:
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Accounting and reporting resources. The Company does not have the accounting and financial reporting resources to adequately and
timely address complex and unusual accounting issues and related disclosures as well as perform a high level management review to detect material
errors in the financial statements.
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The material weakness described above, or other material weaknesses which we become aware of in the future, could result in us determining that our
controls and procedures are not effective in future periods or could result in a material misstatement of the consolidated financial statements that would not be
prevented or detected.
Effective internal controls over financial reporting and disclosure controls and procedures are necessary for us to provide reliable financial and other
reports and effectively prevent fraud. If we cannot maintain effective internal controls or provide reliable financial or SEC reports or prevent fraud, investors may
lose confidence in our SEC reports, our operating results and the trading price of our common stock could suffer and we might become subject to litigation.
The report of our independent registered public accounting firm has previously expressed substantial doubt about the Company’s ability to
continue as a going concern and future reports may similarly express a going concern.
Our auditors indicated in their report on the Company’s financial statements for the fiscal year ended December 31, 2015 that conditions existed that
raise a substantial doubt about our ability to continue as a going concern due to our net loss for the year ended December 31, 2015. A similar future “going
concern” opinion could impair our ability to finance our operations through the sale of equity, incurring debt, or other financing alternatives and/or negatively affect
our relationships with customers and suppliers and/or negatively effect the willingness of our suppliers to allow us to maintain credit with them. Our ability to
continue as a going concern will depend upon our ability to grow our operations and integrate newly acquired assets and operations, our ability to acquire
additional assets and operations, and our ability to improve operating margins and regain profitability. If we are unable to achieve these goals, our business would
be jeopardized and the Company may not be able to continue. If we ceased operations, it is likely that all of our investors would lose their investment.
Our ability to use our net operating loss carry-forwards 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
carry-forwards 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 carry-forwards 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 inventory is subject to significant impairment charges in the event the prices of oil and gas fall sharply after such inventory is acquired.
We did not have an inventory impairment charge for the period ended December 31, 2016 and 2015. In the event, commodity prices fall sharply during
any period requiring the Company to take a non-cash charge/adjustment to the value of our products in inventory taking into account the lower market value for
the products being held for sale. Similar significant impairment charges could negatively affect our balance sheet, result in us not meeting certain debt ratios set
forth in our credit and loan agreements, and negatively affect our cash flows. Future significant impairment charges and/or significant decreases in oil prices could
have a material adverse effect on our balance sheet, debt covenants (including creating an event of default) and could further cause the value of our securities to
decline in value.
Future conditions might require us to make write-downs in our assets, which would adversely affect our balance sheet and
results of operations.
We review our long-lived tangible and intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value of
an asset may not be recoverable. We also test our goodwill and indefinite-lived intangible assets for impairment at least annually on December 31, or when
events or changes in the business environment indicate that the carrying value of a reportable segment may exceed its fair value. During and as of the end of
each of 2016 and 2015, we determined that $0 and $5,199,803, respectively, in asset write-downs were required. However, if conditions in any of the businesses
in which we compete were to deteriorate, we could determine that certain of our assets were impaired and we would then be required to write-off all or a portion of
our costs for such assets. Any such significant write-offs would adversely affect our balance sheet and results of operations.
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Risks Relating to Acquisitions
We face risks associated with the integration of the businesses, assets and operations acquired from E-Source, Omega and Heartland.
We previously acquired substantially all of the assets and operations of E-Source, which provides dismantling, demolition, decommission and marine
salvage services at industrial facilities throughout the Gulf Coast; Omega Holdings including Omega Refining (including the Marrero, Louisiana re-refinery and
Omega’s Myrtle Grove complex in Belle Chasse, Louisiana) and Heartland, as related to and used in an oil re-refinery and, in connection with the collecting,
aggregating and purchasing of used lubricating oils and the re-refining of such oils into processed oils and other products.
The majority of these acquisitions represented new business lines and operations for us and while our management has significant prior experience in
connection with oil refining and re-refining, it does not have any experience with or in connection with the specific operations of E-Source or those assets and
operations acquired from Omega or Heartland and we may not be able to successfully integrate the acquisitions into our operations and such acquisitions may
not 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.
Our strategy includes pursuing acquisitions, 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 (similar to the acquisitions
of Omega and Heartland) 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.
We may also assume liabilities and environmental liabilities as part of acquisitions (including the Omega acquisition). Although we will endeavor to
accurately estimate and limit liabilities and environmental liabilities presented by the businesses or facilities to be acquired, some liabilities, including ones that
may exist only because of the past operations of an acquired business or facility, may prove to be more difficult or costly to address than we then estimate. It is
also possible that government officials responsible for enforcing environmental laws may believe an environmental liability is more significant than we then
estimate, or that we will fail to identify or fully appreciate an existing liability before we become legally responsible to address it. We may have no recourse, or
only limited recourse, to the former owners of such properties in the event such liabilities are present. As a
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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 may not 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 not successfully identify and complete acquisitions on favorable terms or achieve anticipated synergies relating to any acquisitions,
and such acquisitions could result in unforeseen operating difficulties and expenditures and require significant management resources.
We regularly review potential acquisitions of complementary businesses, services or products. However, we may be unable to identify suitable acquisition
candidates in the future. Even if we identify appropriate acquisition candidates, we may be unable to complete or finance such acquisitions on favorable terms, if
at all. In addition, the process of integrating an acquired business, service or product into our existing business and operations may result in unforeseen operating
difficulties and expenditures. Integration of an acquired company also may require significant management resources that otherwise would be available for
ongoing development of our business. Moreover, we may not realize the anticipated benefits of any acquisition or strategic alliance and such transactions may
not generate anticipated financial results. Future acquisitions could also require us to incur debt, assume contingent liabilities or amortize expenses related to
intangible assets, any of which could harm our business.
Our ability to make acquisitions may be adversely impacted by our outstanding indebtedness and by the price of our stock.
Our ability to make future business acquisitions, particularly those that would be financed solely or in part through cash from operations, may be curtailed
due to our obligations to make payments of principal and interest on our outstanding indebtedness. We may not have sufficient capital resources, now or in the
future, and may be unable to raise sufficient additional capital resources on terms satisfactory to us, if at all, in order to meet our capital requirements for such
acquisitions. In addition, the terms of our indebtedness include covenants that directly restrict, or have the effect of restricting, our ability to make certain
acquisitions while this indebtedness remains outstanding. To the extent that the amount of our outstanding indebtedness has a negative impact on our stock price,
using our common stock as consideration will be less attractive for potential acquisition candidates. The future trading price of our common stock could limit our
willingness to use our equity as consideration and the willingness of sellers to accept our shares and as a result could limit the size and scope of our acquisition
program. If we are unable to pursue strategic acquisitions that would enhance our business or operations, the potential growth of our business and revenues may
be adversely affected.
Legal, Environmental, Governmental and Regulatory Risks
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.
Climate change may adversely affect our facilities and our ongoing operations.
The potential physical effects of climate change on our operations are highly uncertain and depend upon the unique geographic and environmental factors
present. Examples of such effects include rising sea levels at our coastal facilities, changing storm patterns and intensities, and changing temperature levels. As
many of our facilities are located near coastal areas, rising sea levels may disrupt our ability to operate those facilities or transport feedstock and products.
Extended periods of such disruption could have an adverse effect on our results of operation. We could also incur substantial costs to protect or repair these
facilities.
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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;
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.
Our trucking operations are subject to a number of federal, state and local rules and regulations generally governing such activities as authorization to
engage in motor carrier operations, safety compliance and reporting, contract compliance, insurance requirements, taxation and financial reporting. We could be
subject to new or more restrictive regulations, such as regulations relating to engine emissions, drivers’ hours of service, occupational safety and health,
ergonomics or cargo security. Compliance with such regulations could substantially reduce equipment productivity, and the costs of compliance could increase
our operating expenses.
Environmental laws also govern the presence, maintenance and removal of asbestos-containing building materials, or ACBM, and may impose fines and
penalties for failure to comply with these requirements. Such laws require that owners or operators of buildings containing ACBM (and employers in such
buildings) properly manage and maintain the asbestos, adequately notify or train those who may come into contact with asbestos, and undertake special
precautions, including removal or other abatement, if asbestos would be disturbed during renovation or demolition of a building or plant. In addition, the presence
of ACBM in our properties or plants may expose us to third-party liability (e.g., liability for personal injury associated with exposure to asbestos).
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.
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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 re-refining plants 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.
Environmental, health and safety laws, regulations and permit requirements, and the potential for further expanded laws, regulations and permit
requirements may increase our costs or reduce demand for our products and thereby negatively affect our business. Environmental permits required for our
operations are subject to periodic renewal and may be revoked or modified for cause or when new or revised environmental requirements are implemented.
Changing and increasingly strict environmental requirements and the potential for further expanded regulation may increase our costs and can affect the
manufacturing, handling, processing, distribution and use of our products. If so affected, our business and operations may be materially and adversely affected. In
addition, changes in these requirements may cause us to incur substantial costs in upgrading or redesigning our facilities and processes, including our waste
treatment, storage, disposal and other waste handling practices and equipment. For these reasons, we may need to make capital expenditures beyond those
currently anticipated to comply with existing or future environmental or safety laws. The application of environmental, health and safety laws, regulations and
permit requirements to our business may cause us to limit our production, significantly increase the costs of our operations and activities, reduce the market for
our products or to otherwise adversely affect our financial condition, results of operations or prospects.
Climate change legislation or regulations restricting emissions of greenhouse gases could result in increased operating and capital costs and
reduced demand for our products.
There is a growing belief that emissions of greenhouse gases, or GHGs, such as carbon dioxide and methane, may be linked to climate change. Climate
change and the costs that may be associated with its impacts and the regulation of GHGs have the potential to affect our business in many ways, including
negatively impacting the costs of our operations, transportation costs, feedstock costs and demand for our products (due to changes in both costs and weather
patterns).
In recent years, the U.S. Congress has from time to time considered adopting legislation to reduce emissions of GHGs and almost one-half of the states
have already taken legal measures to reduce emissions of GHGs primarily through the planned development of GHG emission inventories and/or regional GHG
cap and trade programs. Most of these cap and trade programs work by requiring major sources of emissions, such as electric power plants, or major producers
of fuels, such as refineries and gas processing plants, to acquire and surrender emission allowances. The number of allowances available for purchase is
generally reduced each year in an effort to achieve the overall GHG emission reduction goal.
Depending on the scope of a particular program, we could be required to purchase and surrender allowances for GHG emissions resulting from our
operations. Although most of the state-level initiatives have to date been focused on large sources of GHG emissions, such as electric power plants, it is possible
that smaller sources such as our operations could become subject to GHG-related regulation. Depending on the particular program, we could be required to
control emissions or to purchase and surrender allowances for GHG emissions resulting from our operations. Independent of Congress, the Environmental
Protection Agency (EPA) has adopted regulations controlling GHG emissions under its existing Clean Air Act authority. For example, on December 15, 2009, the
EPA officially published its findings that emissions of carbon dioxide, methane and other GHGs present an endangerment to human health and the environment
because emissions of such gases are, according to the EPA, contributing to warming of the earth’s atmosphere and other climatic changes. These findings by the
EPA allow the agency to proceed with the adoption and implementation of regulations that would restrict emissions of greenhouse gases under existing
provisions of the federal Clean Air Act. In 2009, the EPA adopted rules regarding regulation of GHG emissions from motor vehicles. In 2010, EPA also issued a
final rule, known as the “Tailoring Rule,” that makes certain large stationary sources and modification projects subject
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to permitting requirements for greenhouse gas emissions under the Clean Air Act. In addition, on September 22, 2009, the EPA issued a final rule requiring the
reporting of greenhouse gas emissions from specified large greenhouse gas emission sources in the U.S. beginning in 2011 for emissions occurring in 2010.
None of our facilities currently generate enough greenhouse gasses to be subject to this reporting requirement under this rule, but we could become subject to
such reporting requirements in the future.
Although it is not possible at this time to accurately estimate how potential future laws or regulations addressing greenhouse gas emissions would impact
our business, any future federal laws or implementation of regulations that may be adopted to address greenhouse gas emissions could require us to incur
increased operating costs and could adversely affect demand for our feedstocks and resulting products, and/or increase our transportation costs. The potential
increase in the costs of our operations resulting from any legislation or regulation to restrict emissions of greenhouse gases could include new or increased costs
to operate and maintain our facilities, install new emission controls on our facilities, acquire allowances to authorize our greenhouse gas emissions, pay any taxes
related to our greenhouse gas emissions and administer and manage a greenhouse gas emissions program. While we may be able to include some or all of such
increased costs in the rates charged for our products, such recovery of costs is uncertain. Moreover, incentives to conserve energy or use alternative energy
sources could reduce demand for our products and/or lower the supply of our feedstocks. We cannot predict with any certainty at this time how these possibilities
may affect our operations. Many scientists have concluded that increasing concentrations of GHGs in the Earth’s atmosphere may produce climate change that
could have significant physical effects, such as increased frequency and severity of storms, droughts, and floods and other climatic events; if such effects were to
occur, they could have an adverse effect on our operations.
The adoption of regulations implementing recent financial reform legislation could impede our ability to manage business and financial risks
by restricting our use of derivative instruments as hedges against fluctuating commodity prices.
The U.S. Congress adopted the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010 (the “ Dodd-Frank Act”). This comprehensive
financial reform legislation establishes federal oversight and regulation of the over-the-counter derivatives market and entities that participate in that market. The
Dodd-Frank Act requires the Commodity Futures Trading Commission (“CFTC”), the SEC and other regulators to promulgate rules and regulations implementing
the new legislation. The CFTC has adopted regulations to set position limits for certain futures and option contracts in the major energy markets and for swaps
that are their economic equivalents. Certain bona fide hedging transactions or derivative instruments would be exempt from these position limits. The Dodd-Frank
Act may also require compliance with margin requirements and with certain clearing and trade-execution requirements in connection with certain derivative
activities. The final rules will be phased in over time according to a specified schedule which is dependent on finalization of certain other rules to be promulgated
by the CFTC and the SEC.
The Dodd-Frank Act and any new regulations could significantly increase the cost of some commodity derivative contracts (including through
requirements to post collateral), materially alter the terms of some commodity derivative contracts and reduce the availability of some derivatives to protect against
risks we encounter. While we are not currently party to any commodity derivative contracts, we may enter into such contracts in the future and the Dodd-Frank
Act and any new regulations may have the effect of making our results of operations more volatile and our cash flows may be less predictable, if we are unable to
enter into commodity derivative contracts or similar hedging transactions in the future. Finally, the Dodd- Frank Act was intended, in part, to reduce the volatility of
oil and natural gas prices, which some legislators attributed to speculative trading in derivatives and commodity instruments related to oil and natural gas. If the
Dodd-Frank Act and any new regulations result in lower commodity prices, our revenues could be adversely affected. Any of these consequences could
adversely affect our business, financial condition and results of operations.
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
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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.
Our operations are subject to numerous statutory and regulatory requirements, which may increase in the future.
Our operations are subject to numerous statutory and regulatory requirements, and our ability to continue to hold licenses and permits required for our
businesses is subject to maintaining satisfactory compliance with such requirements. These requirements may increase in the future as a result of statutory and
regulatory changes. Although we are very committed to compliance and safety, we may not, either now or in the future, be in full compliance at all times with
such statutory and regulatory requirements. Consequently, we could be required to incur significant costs to maintain or improve our compliance with such
requirements.
We may also assume additional environmental liabilities as part of further acquisitions. Although we will endeavor to accurately estimate and limit
environmental liabilities presented by the businesses or facilities to be acquired, some liabilities, including ones that may exist only because of the past operations
of an acquired business or facility, may prove to be more difficult or costly to address than we then estimate. It is also possible that government officials
responsible for enforcing environmental laws may believe an environmental liability is more significant than we then estimate, or that we will fail to identify or fully
appreciate an existing liability before we become legally responsible to address it.
We may be subject in the normal course of business to judicial, administrative or other third-party proceedings that could interrupt or limit our
operations, require expensive remediation, result in adverse judgments, settlements or fines and create negative publicity.
Governmental agencies may, among other things, impose fines or penalties on us relating to the conduct of our business, attempt to revoke or deny
renewal of our operating permits, franchises or licenses for violations or alleged violations of environmental laws or regulations or as a result of third-party
challenges, require us to install additional pollution control equipment or require us to remediate potential environmental problems relating to any real property that
we or our predecessors ever owned, leased or operated or any waste that we or our predecessors ever collected, transported, disposed of or stored. Individuals,
citizens groups, trade associations or environmental activists may also bring actions against us in connection with our operations that could interrupt or limit the
scope of our business. Any adverse outcome in such proceedings could harm our operations and financial results and create negative publicity, which could
damage our reputation, competitive position and stock price. 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.
The adoption of climate change legislation or regulation could result in increased operating costs and reduced demand for the refined
products we produce.
The U.S. government, including the EPA, as well as several state and international governments, have either considered or adopted legislation or
regulations in an effort to reduce greenhouse gas (GHG) emissions. These proposed or promulgated laws apply or could apply in states where we have interests
or may have interests in the future. In addition, various groups suggest that additional laws may be needed in an effort to address climate change, as illustrated by
the Paris Agreement negotiated at the 2015 United Nations Conference on Climate Change, referred to as COP 21, which entered into force on November 4,
2016. We cannot predict the extent to which any such legislation or regulation will be enacted and, if so, what its provisions would be. To the extent we incur
additional costs required to comply with the adoption of new laws and regulations that are not ultimately reflected in the prices of our products and services, our
business, financial condition, results of operations and cash flows in future periods could be materially adversely affected. In addition, demand for the products we
produce could be adversely affected.
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Risks Related to Our Recovery Division
Our Recovery division participates from time to time in one-time projects, which could create fluctuations in revenue and gross profit from
quarter to quarter.
Our Recovery division periodically participates in one-time, non-ongoing projects and therefore we expect to see fluctuations in revenue and gross profit
from this division from quarter to quarter and period to period. Consequently, the results of operations, net income (loss), revenue and gross profit for our
Recovery division for any quarter or period may not be indicative of the results of operations, net income (loss), revenue and gross profit for any subsequent
quarter or period.
Recovery division customers may cancel or delay projects.
Recovery division customers may cancel or delay projects for reasons beyond our control. If projects are delayed, the timing of our revenues could be
affected. Revenue recognition occurs over long periods of time and is subject to unanticipated delays. If we receive relatively large orders in any given quarter,
fluctuations in the levels of our quarterly backlog can result because the backlog in that quarter may reach levels that may not be sustained in subsequent
quarters. As a result, our backlog may not be indicative of our future revenues.
The dismantling, demolition, decommission and marine salvage operations of our Recovery division subjects us to operational and safety
risks.
Our Recovery division provides dismantling, demolition, decommission and marine salvage services at industrial facilities throughout the Gulf Coast. The
division also owns and operates a fleet of trucks and other vehicles used for shipping and handling equipment and scrap materials. Such operations could
potentially result in releases of hazardous materials, injury or death of our employees or third parties, environmental contamination claims, and claims for damage
to property both from third parties and our customers and clients. These risks expose us to potential liability for pollution and other environmental damages,
personal injury, loss of life, business interruption, and property damage or destruction. While we seek to minimize and obtain insurance to limit our exposure to
such risks, such actions and insurance may not be adequate to cover all of our potential liabilities and such insurance may not in the future be available at
commercially reasonable rates. If we were to incur substantial liabilities in excess of policy limits or at a time when we were not able to obtain adequate liability
insurance on commercially reasonable terms, our business, results of operations and financial condition could be adversely affected to a material extent.
Furthermore, should our safety record deteriorate, we could be subject to a potential reduction of revenues from our Recovery division.
Risks Related to Our Common Carrier Operations
We face competition from other common carriers and transportation providers.
Crossroad 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.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Risks Related to Our Prior Offering Terms
We face significant penalties and damages in the event registration statements we filed to register certain securities sold in our prior offerings
are subsequently suspended or terminated.
We previously agreed to register the shares of common stock issuable upon conversion of the Series B Preferred Stock, Series B1 Preferred Stock and
upon exercise of the warrants sold in connection therewith under the Securities Act, for resale. The agreements pursuant to which we sold such securities,
provide for liquidated damages upon the occurrence of certain events. The amount of the liquidated damages is 1.0% of the aggregate subscription amount paid
by an investor for the units (i.e., Series B Preferred Stock and warrants and/or Series B1 Preferred Stock and warrants) affected by the event that are still held by
the investor upon the occurrence of the event, due on the date immediately following the event that caused such failure (or the 30th day following such event if
the event relates to the suspension of the registration statement), and each 30 days thereafter, with such payments to be prorated on a daily basis during each 30
day period, subject to a maximum of an aggregate of 6% per year (per transaction). If we fail to pay any liquidated damages in full within seven days after the
date payable, we are required to pay interest thereon at a rate of 12% per annum until paid in full. In the event the registration statement, which has previously
been declared effective within the timeframe required by the purchase agreement, is subsequently suspended or terminated, or we otherwise fail to meet certain
requirements set forth in the purchase agreements, we could be required to pay significant penalties which could adversely affect our cash flow and cause the
value of our securities to decline in value.
General Risks
RISKS RELATED TO OUR SECURITIES
Our Chief Executive Officer, Benjamin P. Cowart, has significant voting control over us, including the appointment of Directors and may have
interests that differ from other shareholders. Mr. Cowart, as a significant shareholder, may, therefore, take actions that are not in the interest of other
shareholders.
Benjamin P. Cowart, our Chairman, President and Chief Executive Officer, beneficially owns approximately 27.1% of our common stock (not including
shares issuable upon exercise of options and warrants held by Mr. Cowart) and 17.2% of our total voting stock, and as such, 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. Should conflicts of interest arise, Mr. Cowart may not act in the best
interests of our other shareholders and conflicts of interest may not be resolved in a manner favorable to our other shareholders.
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 currently have limited research coverage by securities and industry analysts. 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
securities.
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, preferred 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, preferred 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
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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 and volatile market for our common stock, and the market for our common stock is and may remain sporadic
and volatile in the future.
We currently have a sporadic and volatile market for our common stock, which market is anticipated to remain sporadic and volatile in the future, and will
likely be subject to wide fluctuations in response to several factors, including, but not limited to:
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•
•
•
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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 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. Shareholders and potential investors in our common stock should
exercise caution before making an investment in us, and should not rely solely 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.
Additionally, 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.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
There may be future sales and issuances of our common stock, which could adversely affect the market price of our common stock and dilute
shareholders ownership of common stock.
The exercise of any options granted to executive officers, directors and other employees under our equity compensation plans, the exercise of
outstanding warrants, the conversion of outstanding convertible securities and other issuances of our common stock in the future could have an adverse effect on
the market price of the shares of our common stock. We are not restricted from issuing additional shares of common stock, including any securities that are
convertible into or exchangeable for, or that represent the right to receive shares of common stock, provided that we are subject to the requirements of the
Nasdaq Capital Market (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), subject to certain exceptions. Sales of a
substantial number of shares of our common stock in the public market or the perception that such sales might occur could materially adversely affect the market
price of the shares of our common stock. Because our decision to issue securities in any future offering or transaction will depend on market conditions and other
factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings or issuances. Additionally, the sale of a significant
portion of our common stock may cause the value of our common stock to decline in value.
Our outstanding options, warrants and convertible securities may adversely affect the trading price of our common stock.
We have (i) 3,206,916 outstanding stock options at a weighted average exercise price of $4.33 per share; (ii) 7,353,061 outstanding warrants to purchase
7,353,061 shares of common stock at a weighted average exercise price of $2.34 per share; (iii) 462,644 shares of common stock issuable upon the conversion
of our 462,644 outstanding shares of Series A Convertible Preferred Stock (which convert on a one-for-one basis (subject to adjustments for stock splits and
recapitalizations) into common stock); (iv) 3,277,856 shares of common stock issuable upon conversion of our 3,277,856 outstanding shares of Series B Preferred
Stock (which convert on a one-for-one basis (subject to adjustments for stock splits and recapitalizations) into common stock); (v) 12,393,608 shares of common
stock issuable upon conversion of our 12,393,608 outstanding shares of Series B1 Preferred Stock (which convert on a one-for-one basis (subject to adjustments
for stock splits and recapitalizations) into common stock); and (vi) 3,156,800 shares of common stock issuable upon conversion of our 31,568 outstanding shares
of Series C Convertible Preferred Stock (which each convert into 100 shares of common stock (subject to adjustments for stock splits and recapitalizations)). For
the life of the options and warrants, the holders have the opportunity to profit from a rise in the market price of our common stock without assuming the risk of
ownership. The issuance of shares upon the exercise of outstanding securities will also dilute the ownership interests of our existing stockholders.
The availability of these shares for public resale, as well as any actual resales of these shares, could adversely affect the trading price of our common
stock. We cannot predict the size of future issuances of our common stock pursuant to the exercise of outstanding options or warrants or conversion of other
securities, or the effect, if any, that future issuances and sales of shares of our common stock may have on the market price of our common stock. Sales or
distributions of substantial amounts of our common stock (including shares issued in connection with an acquisition), or the perception that such sales could
occur, may cause the market price of our common stock to decline.
The issuance and sale of common stock upon exercise of the June 2015 Warrants and May 2016 Warrants may cause substantial dilution to
existing stockholders and may also depress the market price of our common stock.
The June 2015 Warrants (described in greater detail below under “ Part II. - Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources - Unit Offerings”) have an exercise price of $3.01 per share and the May 2016 Warrants (described in
greater detail below under “Part II. - Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital
Resources - Unit Offerings”) have an exercise price of $1.53 per share. The June 2015 Warrants are exercisable beginning on December 26, 2015, and expire
December 24, 2020. The May 2016 Warrants are exercisable between November 14, 2016 and November 13, 2021. The June 2015 and May 2016 Warrants
contain a cashless exercise provision in connection with any shares that are not then registered by the Company. Although the June 2015 and May 2016
Warrants may not be exercised by the holders thereof if such exercise would cause such holder to own more than 9.999% of our outstanding common stock (or
4.999% in connection with certain holders), this restriction does not prevent such holders from exercising some of the warrants, selling those shares, and then
exercising the rest of the warrants, while still staying below the 9.999% limit (or 4.999% limit as applicable). In this way, the holders of the warrants could sell
more than this limit while never actually holding more shares than this limit allows. If the holders of the warrants choose to do this, it will cause substantial dilution
to the then holders of our common stock.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
If exercises of the June 2015 Warrants and May 2016 Warrants and sales of such shares issuable upon exercise thereof take place, the price of our
common stock may decline. In addition, the common stock issuable upon exercise of the June 2015 Warrants and May 2016 Warrants may represent overhang
that may also adversely affect the market price of our common stock. Overhang occurs when there is a greater supply of a company’s stock in the market than
there is demand for that stock. When this happens the price of the company’s stock will decrease, and any additional shares which shareholders attempt to sell in
the market will only further decrease the share price. If the share volume of our common stock cannot absorb shares sold by the Warrant holders, then the value
of our common stock will likely decrease.
Risks Relating to our Preferred Stock
We have established preferred stock which can be designated by the Board of Directors without shareholder approval and have established
Series A Preferred Stock, Series B Preferred Stock, Series B1 Preferred Stock and Series C Preferred Stock, which give the holders thereof 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 0.5 million shares are issued and outstanding, 10 million designated shares of Series B Preferred Stock, of which 3,277,856 shares are issued and
outstanding, 17 million designated shares of Series B1 Preferred Stock, of which 12,393,608 shares are issued and outstanding and 44,000 designated shares of
Series C Preferred Stock, of which 31,568 are issued and outstanding. The Series A Preferred Stock has a liquidation preference of $1.49 per share. The Series B
Preferred Stock and Series B1 Preferred stock have a liquidation preference of $3.10 per share and $1.56 per share, respectively, payable only after the
liquidation preference on the Series A Preferred Stock are satisfied. The Series C Preferred Stock has a liquidation preference of $100.00 per share, payable only
after the liquidation preference on the Series A Preferred Stock, Series B Preferred Stock and Series B1 Preferred Stock are satisfied. As a result, if we were to
dissolve, liquidate or sell our assets, the holders of our Series A Preferred Stock would have the right to receive up to the first approximately $0.7 million in
proceeds from any such transaction, holders of our Series B Preferred Stock and Series B1 Preferred Stock would have the right to receive up to approximately
$29.5 million of the remaining proceeds from any such transaction, and the holders of our Series C Preferred Stock would have the right to receive up to $3.2
million of the remaining proceeds from any such transaction, after the payment of amounts owed to certain other of our creditors, but before any amount is paid
to the holders of our common stock. The payment of the liquidation preferences could result in common stock shareholders not receiving any consideration if we
were to liquidate, dissolve or wind up, either voluntarily or involuntarily. Additionally, the existence of the liquidation preferences may reduce the value of our
common stock, make it harder for us to sell shares of common stock in offerings in the future, or prevent or delay a change of control. Furthermore, the
conversion of Series A Preferred Stock, Series B Preferred Stock and Series B1 Preferred Stock (each of which convert on a one-for-one basis (subject to
adjustments for stock splits and recapitalizations)) into common stock and the conversion of Series C Preferred Stock into common stock (which convert into 100
shares of common stock (subject to adjustments for stock splits and recapitalizations)) may cause substantial dilution to our common shareholders. 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.
In addition to the above, we are required to redeem any non-converted shares of (a) Series B Preferred Stock, which remain outstanding on June 24,
2020, at the rate of $3.10 per share (or $10.2 million in aggregate as of the date of this filing); and (b) Series B1 Preferred Stock, which remain outstanding
on June 24, 2020, at the rate of $1.56 per share (or $19.3 million in aggregate as of the date of this filing), subject to the terms of our senior loan documents,
which funds we may not have, or which may not be available on favorable terms, if at all.
The issuance of common stock upon conversion of the Series B Preferred Stock, Series B1 Preferred Stock and Series C Preferred Stock will
cause immediate and substantial dilution to existing shareholders.
The Series B Preferred Stock (including accrued and unpaid dividends) is convertible into shares of the Company’s common stock at any time at $3.10
per share (initially a one-for-one basis). If the Company’s common stock trades at or above $6.20 per share for a period of 20 consecutive trading days, the
Company may at such time force conversion of the Series B Preferred Stock (including accrued and unpaid dividends) into common stock of the Company. The
Series B1 Preferred Stock (including accrued and unpaid dividends) is convertible into shares of the Company’s common stock at the holder’s option at any time
after closing at $1.56 per share (initially a one-for-one basis). If the Company’s common stock trades at or above $3.90 per
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
share for a period of 20 consecutive trading days at any time following the earlier of (a) the effective date of a resale registration statement which we are required
to file to register the resale of the shares of common stock underlying the Series B1 Preferred Stock and May 2016 Warrants pursuant to the May 2016 Purchase
Agreement, or (b) November 13, 2016, the Company may at such time force conversion of the Series B1 Preferred Stock (including accrued and unpaid
dividends) into common stock of the Company. The Series C Preferred Stock is convertible into shares of the Company’s common stock at any time at $1.00 per
share (initially a 100-for-one basis).
The issuance of common stock upon conversion of the Series B Preferred Stock, Series B1 Preferred Stock and Series C Preferred Stock will result in
immediate and substantial dilution to the interests of other stockholders since the holders of the Series B Preferred Stock, Series B1 Preferred Stock and Series C
Preferred Stock may ultimately receive and sell the full amount of shares issuable in connection with the conversion of such Series B Preferred Stock, Series B1
Preferred Stock and Series C Preferred Stock. Although the Series B Preferred Stock, and Series B1 Preferred Stock may not be converted by the holders
thereof if such conversion would cause such holder to own more than 9.999% of our outstanding common stock (4.999% in the case of certain holders), and the
Series C Preferred Stock may not be converted by the holder thereof if such conversion would cause the holder to own more than 4.999% of our outstanding
common stock, these restrictions do not prevent such holders from converting some of their holdings, selling those shares, and then converting the rest of their
holdings, while still staying below the 9.999%/4.999% limit. In this way, the holders of the Series B Preferred Stock, Series B1 Preferred Stock and Series C
Preferred Stock could sell more than these limits while never actually holding more shares than the limits allow. If the holders of the Series B Preferred Stock ,
Series B1 Preferred Stock or Series C Preferred Stock choose to do this, it will cause substantial dilution to the then holders of our common stock.
Our outstanding Series B Preferred Stock and Series B1 Preferred Stock accrue a cash dividend.
Our Series B Preferred Stock accrues a dividend, payable quarterly in arrears (based on calendar quarters), in the amount of 6% per annum of the
original issuance price of the Series B Preferred Stock ($3.10 per share or $25.7 million in aggregate as of the date of this report). The dividend is payable by the
Company, at the Company’s election, in registered common stock of the Company (if available) or cash, provided that any cash dividend payment is subject to us
previously having repaid all amounts owed to our senior lender. In the event dividends are paid in registered common stock of the Company, the number of
shares payable will be calculated by dividing (a) the accrued dividend by (b) 90% of the arithmetic average of the volume weighted average price (VWAP) of the
Company’s common stock for the 10 trading days immediately prior to the applicable date of determination (the “June 2015 Dividend Stock Payment Price ”).
Notwithstanding the foregoing, in no event may the Company pay dividends in common stock unless the applicable June 2015 Dividend Stock Payment Price is
above $2.91. If the Company is prohibited from paying, or chooses not to pay the dividend in cash (due to contractual senior credit agreements or other
restrictions) or is unable to pay the dividend in registered common stock, the dividend will be paid in-kind in Series B Preferred Stock shares at $3.10 per share.
The Series B1 Preferred Stock accrues a dividend, payable quarterly in arrears (based on calendar quarters), in the amount of 6% per annum of the
original issuance price of the Series B1 Preferred Stock ($1.56 per share or $19.5 million in aggregate), provided that such dividend increases to 9% if certain
Consolidated Adjusted EBITDA targets are not met during 2016-2017, until the earlier of (a) the date the next target is met, or (b) June 30, 2018 (provided that
the Consolidated Adjusted EBITDA target for the six months ended December 31, 2016 was met). The dividend is payable by the Company, at the Company’s
election, in registered common stock of the Company (if available) or cash, provided that any cash dividend payment is subject to us previously having repaid all
amounts owed to our senior lender, which has been repaid to date. In the event dividends are paid in registered common stock of the Company, the number of
shares payable will be calculated by dividing (a) the accrued dividend by (b) 90% of the VWAP of the Company’s common stock for the 10 trading days
immediately prior to the applicable date of determination (the “May 2016 Dividend Stock Payment Price ”). Notwithstanding the foregoing, in no event may the
Company pay dividends in common stock unless the applicable May 2016 Dividend Stock Payment Price is above $1.52. If the Company is prohibited from
paying, or chooses not to pay, the dividend in cash (due to contractual senior credit agreements or other restrictions) or is unable to pay the dividend in
registered common stock, the dividend will be paid in-kind in Series B1 Preferred Stock shares at $1.56 per share.
We may not have sufficient available cash to pay the dividends as they accrue. The payment of the dividends, or our failure to timely pay the dividends
when due, could reduce our available cash on hand, have a material adverse effect on our results of operations and cause the value of our stock to decline in
value. Additionally, the issuance of shares of common stock or additional shares of Series B Preferred Stock or Series B1 Preferred Stock in lieu of cash
dividends (and the subsequent conversion of such Series B Preferred Stock or Series B1 Preferred Stock into common stock pursuant to the terms of such Series
B Preferred Stock and Series B1 Preferred Stock) could cause substantial dilution to the then holders of our common stock.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
We may be required to issue additional shares of Series B Preferred Stock and Series B1 Preferred Stock upon the occurrence of certain
events.
As described above, in the event we do not have available cash to pay the dividends which accrue on the Series B Preferred Stock and Series B1
Preferred Stock in cash, we are prohibited from paying such dividends in cash, or choose not to pay such dividends in cash and/or we do not have sufficient
registered shares of common stock available to allow for the payment of such dividends in common stock, we are required to pay such dividends in-kind in (a)
Series B Preferred Stock shares at $3.10 per share, which will also include a $3.10 per share liquidation preference in connection with the Series B Preferred
Stock dividends; and (b) Series B1 Preferred Stock shares at $1.56 per share, which will also include a $1.56 per share liquidation preference in connection with
the Series B1 Preferred Stock, and the right to convert into common stock on a one-for-one basis.
The issuance and sale of common stock upon conversion of the Series B Preferred Stock, Series B1 Preferred Stock and Series C Preferred
Stock may depress the market price of our common stock; and the redemption of the Series B Preferred Stock and Series B1 Preferred Stock, if not
converted into common stock prior to the required redemption date, will require significant additional funds.
If conversions of the Series B Preferred Stock, Series B1 Preferred Stock and Series C Preferred Stock and sales of such converted shares take place,
the price of our common stock may decline. In addition, the common stock issuable upon conversion of the Series B Preferred Stock, Series B1 Preferred Stock
and Series C Preferred Stock may represent overhang that may also adversely affect the market price of our common stock. Overhang occurs when there is a
greater supply of a company’s stock in the market than there is demand for that stock. When this happens the price of the company’s stock will decrease, and any
additional shares which shareholders attempt to sell in the market will only further decrease the share price. If the share volume of our common stock cannot
absorb converted shares sold by the Series B Preferred Stock holders, then the value of our common stock will likely decrease.
In addition to the above, we are required to redeem any non-converted shares of (a) Series B Preferred Stock, which remain outstanding on June 24,
2020, at the rate of $3.10 per share (or $10.2 million in aggregate as of the date of this filing); and (b) Series B1 Preferred Stock, which remain outstanding
on June 24, 2020, at the rate of $1.56 per share (or $19.3 million in aggregate as of the date of this filing), which funds we may not have, or which may not be
available on favorable terms, if at all.
Risks Relating to Our Listing on the Nasdaq Capital Market
Our Common Stock may be delisted from the Nasdaq Capital Market if we cannot satisfy Nasdaq’s continued listing requirements.
Among the conditions required for continued listing on the Nasdaq Capital Market, Nasdaq requires us to maintain at least $2.5 million in stockholders’
equity or $500,000 in net income over the prior two years or two of the prior three years, to have a majority of independent directors, and to maintain a stock price
over $1.00 per share. Our stockholders’ equity may not remain above Nasdaq’s $2.5 million minimum, we may not generate over $500,000 of yearly net income
moving forward, we may not be able to maintain independent directors, and we may not be able to maintain a stock price over $1.00 per share (our 52 week low
as of the date of this filing was $0.90). If we fail to timely comply with the applicable requirements, our stock may be delisted. In addition, even if we demonstrate
compliance with the requirements above, we will have to continue to meet other objective and subjective listing requirements to continue to be listed on the
Nasdaq Capital Market. Delisting from the Nasdaq Capital Market could make trading our common stock more difficult for investors, potentially leading to declines
in our share price and liquidity. Without a Nasdaq Capital Market listing, stockholders may have a difficult time getting a quote for the sale or purchase of our
stock, the sale or purchase of our stock would likely be made more difficult and the trading volume and liquidity of our stock could decline. Delisting from the
Nasdaq Capital Market could also result in negative publicity and could also make it more difficult for us to raise additional capital. The absence of such a listing
may adversely affect the acceptance of our common stock as currency or the value accorded by other parties. Further, if we are delisted, we would also incur
additional costs under state blue sky laws in connection with any sales of our securities. These requirements could severely limit the market liquidity of our
common stock and the ability of our stockholders to sell our common stock in the secondary market. If our common stock is delisted by Nasdaq, our common
stock may be eligible to trade on an over-the-counter quotation system, such as the OTCQB market, where an investor may find it more difficult to sell our stock
or obtain accurate quotations as to the market value of our common stock. In the event our common stock is delisted from the Nasdaq Capital Market, we may
not be able to list our common stock on another national securities exchange or obtain quotation on an over-the counter quotation system.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
If we are delisted from the Nasdaq Capital Market, your ability to sell your shares of our common stock could also be limited by the penny
stock restrictions, which could further limit the marketability of your shares.
If our common stock is delisted, it could come within the definition of “ penny stock” as defined in the Exchange Act and would then be covered by
Rule 15g-9 of the Exchange Act. That Rule imposes additional sales practice requirements on broker-dealers who sell securities to persons other than
established customers and accredited investors. For transactions covered by Rule 15g-9, the broker-dealer must make a special suitability determination for the
purchaser and receive the purchaser’s written agreement to the transaction prior to the sale. Consequently, Rule 15g-9, if it were to become applicable, would
affect the ability or willingness of broker-dealers to sell our securities, and accordingly would affect the ability of stockholders to sell their securities in the public
market. These additional procedures could also limit our ability to raise additional capital in the future.
Due to the fact that our common stock is listed on the Nasdaq Capital Market, we are subject to financial and other reporting and corporate
governance requirements which increase our costs and expenses.
We are currently required to file annual and quarterly information and other reports with the Securities and Exchange Commission that are specified in
Sections 13 and 15(d) of the Securities Exchange Act of 1934, as amended. Additionally, due to the fact that our common stock is listed on the Nasdaq Capital
Market, we are also subject to the requirements to maintain independent directors, comply with other corporate governance requirements and are required to pay
annual listing and stock issuance fees. These obligations require a commitment of additional resources including, but not limited, to additional expenses, and may
result in the diversion of our senior management’s time and attention from our day-to-day operations. These obligations increase our expenses and may make it
more complicated or time consuming for us to undertake certain corporate actions due to the fact that we may require Nasdaq approval for such transactions
and/or Nasdaq rules may require us to obtain shareholder approval for such transactions.
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. These facilities are related to the operations of the Black Oil division.
In addition, the Company leases three smaller facilities, one located in San Antonio, Texas one in Mission, Texas, and one in Dallas, 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 which expired 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, provided that while not formally extended, we continue to operate under the same terms of the now expired lease. The Mission, Texas lease
has a term expiring on November 1, 2019, and a rental cost of $650 per month. The Dallas lease expired in August 31, 2015, but we continue to lease this facility
on month to month basis for a rental cost of $3,000 per month. These facilities are related to the operations of the Black Oil division.
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 30, 2032. The monthly rent relating to this facility is approximately $25,000 per month through
November 2027, and $30,000 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. This facility is related to the operations of the Black Oil division.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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. 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. This property relates to general administrative functions of the Company and is
proportionally allocated to each of our three divisions.
The Company leases three smaller facilities, one located in Zanesville, Ohio, one in Mount Sterling, Kentucky, and one in Ravenswood, West Virginia
each with a small yard for the parking of trucks, small storage tanks and an office. The Zanesville facility is leased under a twelve month lease with automatic
renewals (subject to either party providing a written notice to the other party of the intent to cancel the lease prior to thirty days from the expiration of the current
term), which has a rental cost of $3,500 per month. The Mount Sterling, Kentucky lease has a term expiring on March 22, 2018, automatically renewable
thereafter on a month-to-month basis, pursuant to the terms of the lease, and a rental cost of $1,750 per month. The Ravenswood, West Virginia lease had a
term expiring October 1, 2016, but we continue to lease this facility on a month to month basis for a rental cost of $1,739 per month.
The Company owns five other facilities, which are located in Ohio. Two facilities located in Columbus, of which one is the location of our refinery and the
other is for the storage of feedstocks and finished products. There are two locations in Zanesville, of which one is used for an office, small warehouse facilities for
operations and a yard area for the parking of trucks, and the other is used for bulk used oil storage and as a transfer facility. The fifth facility is located in Norwalk
and is used for bulk storage of used oil and as a transfer facility. All properties relate to the operations of the Black Oil division.
Marrero Facility:
We lease a used motor oil refinery located in Marrero, Louisiana. The facility was constructed in 1992 by Chevron Texaco, can currently process more
than 180,000 gallons per day and has a total storage capacity of nearly 17 million gallons. The facility is accessible by truck, rail, and barge. The lease has a term
expiring in April 2018, with a monthly rental cost of $283,000. The lease also provides us the right to extend the lease for up to four additional five year extension
terms through April 2038. This facility is related to the operations of the Black Oil division.
Myrtle Grove:
We lease 45 acres of land on the Gulf Coast in Myrtle Grove, Louisiana. The site, which is currently being developed, is located approximately 26 miles
from the Marrero facility (described above). Existing infrastructure includes offices and maintenance buildings, a lab, a control room, and a process area with
existing piling and concrete, loading and unloading areas and fire protection for the process area. We also own and/or lease additional refining equipment located
on site. The lease has a term expiring in May 2017, and a rental cost of $50,000 per month. The lease also has 10 additional five year term renewal options
through 2067, with the rental cost of each extension term increasing by 8% of the preceding term. This facility is related to the operations of the Black Oil division.
Churchill County, Nevada Facility:
Prior to our entry into the Sale Agreement (described and defined below under “ 2016 Material Events-Purchase and Sale Agreement, Churchill County,
Nevada Plant”), we, through Vertex Refining NV, leased a used oil re-refining plant located on approximately 40 acres in Churchill County, Nevada (the “ Bango
Plant”). The lease for the Bango Plant was entered into on April 30, 2015. The term of the Bango lease was to continue until August 10, 2025, subject to our right
under certain circumstances to extend such lease. No rent was due under the Bango lease until January 1, 2016, at which time rent in the amount of $244,000
per month was due for the remainder of the term of the lease. The lease also allowed us the option to pay 2016 rent in shares of our common stock. The Bango
lease also provided for a purchase option which we exercised as part of the transactions contemplated by the Sale Agreement. As a result of the Sale Agreement
we no longer lease or own the Bango Plant.
In addition to the Bango lease for the Bango Plant, Vertex Refining NV was also party to two Lease and Purchase Agreements (the “ Equipment Leases”)
which began on April 30, 2015, and continued until the date of the closing of the Sale Agreement. The Equipment Leases provided for the use of a rail facility and
related equipment and a pre-fabricated metal building located at the plant. The Equipment Leases were to expire on December 31, 2016, subject to certain rights
Vertex Refining NV had to terminate the leases earlier. The monthly rental costs for the leases were $16,300 and $3,800 per month, respectively, provided no rent
was due for fiscal 2015. As a result of the Sale Agreement we are no longer party to the Equipment Leases.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Golden State:
In connection with the initial closing of the Omega Transaction (see above), our subsidiary, Vertex Refining NV, LLC (" Vertex Refining NV ") acquired
100% of the issued and outstanding membership interests in Golden State Lubricants Works, LLC ("GSLW"). GSLW leased a blending and storage facility (the
"Facility") with attached office space in Bakersfield, California. The Facility has total tank capacity of nearly 5 million gallons and offers excellent rail and truck
access. The lease has a term expiring March 31, 2026 with monthly rental cost of $59,800. After exploring various options with respect to the Facility, it was
decided that this asset did not fit the long range plans of the Company. In August, 2015, we notified the landlord that we were no longer planning to pay the
monthly rental. The landlord has not formally terminated the lease, or released GSLW from any obligations under the lease.
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. However, we continue to evaluate the purchase or lease of additional properties or the consolidation of our properties, as our business requires.
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.
Vertex Refining LA, LLC, the wholly-owned subsidiary of Vertex Operating, was named as a defendant, along with numerous other parties, in five lawsuits
filed on or about February 12, 2016, in the Second Parish Court for the Parish of Jefferson, State of Louisiana, Case No. 121749, by Russell Doucet et. al., Case
No. 121750, by Kendra Cannon et. al., Case No. 121751, by Lashawn Jones et. al., Case No. 121752, by Joan Strauss et. al. and Case No. 121753, by Donna
Allen et. al. The suits relate to alleged noxious and harmful emissions from our facility located in Marrero, Louisiana. The suits seek damages for physical and
emotional injuries, pain and suffering, medical expenses and deprivation of the use and enjoyment of plaintiffs’ homes. We intend to vigorously defend ourselves
and oppose the relief sought in the complaints, provided that at this stage of the litigation, the Company has no basis for determining whether there is any
likelihood of material loss associated with the claims and/or the potential and/or the outcome of the litigation.
E-Source, a wholly-owned subsidiary of Vertex Operating, was named as a defendant (along with Motiva Enterprises, LLC, (“ Motiva”)) in a lawsuit filed in
the Sixtieth (60th) Judicial District, Jefferson County, Texas, on April 22, 2015. Pursuant to the lawsuit, Whole Environmental, Inc. ("Whole"), made certain
allegations against E-Source, and Motiva. The claims include Breach of Contract and Quantum Meruit actions relating to asbestos abatement and remediation
operations performed for defendants at Motiva’s facility in Port Arthur, Jefferson County, Texas. The plaintiff alleges it is due monies earned. Defendants have
denied any amounts due plaintiff. The suit seeks damages of approximately $864,000, along with pre-judgment and post-judgment interest, the fair value of
certain property alleged to be converted by defendants and reimbursement of legal fees. E-Source has asserted a counterclaim against Whole for the filing of a
mechanic’s lien in excess of any amount(s) actually due as well as a cross-claim against Motiva. Under the terms of E-Source’s contract with Motiva, Motiva was
to pay all sums due to any sub-contractors of E-Source. If any additional monies are owed to Whole, those monies should be paid by Motiva. E-Source seeks to
recover the balance due under its contract with Motiva of approximately $1,000,000. The case is set for trial in the summer of 2017. We intend to vigorously
defend ourselves against the allegations made in the complaint. The Company has no basis of determining whether there is any likelihood of material loss
associated with the claims and/or the potential and/or the outcome of the litigation.
Item 4. Mine Safety Disclosures.
Not applicable.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
On February 13, 2013, our common stock began trading on the NASDAQ Capital Market (“ NASDAQ”) under the symbol “ VTNR”.
The following table sets forth, for the periods indicated, the high and low sales prices for our common stock on the NASDAQ, for the quarters presented.
Prices represent inter-dealer quotations without adjustments for markups, markdowns, and commissions, and may not represent actual transactions.
PART II
QUARTER ENDING
FISCAL 2016
December 31, 2016
September 30, 2016
June 30, 2016
March 31, 2016
FISCAL 2015
December 31, 2015
September 30, 2015
June 30, 2015
March 31, 2015
$
$
$
$
$
$
$
$
1.42 $
1.55 $
2.01 $
2.21 $
2.80 $
2.85 $
3.45 $
4.41 $
0.90
1.10
0.92
0.63
1.00
1.67
1.90
3.14
HOLDERS
As of March 13, 2017, there were approximately (a) 585 holders of record of our common stock, not including holders who hold their shares in street
name, and 33,258,027 shares of common stock issued and outstanding (which number includes 1,258,928 shares of common stock held in escrow in order to
satisfy the indemnification obligations of certain prior acquisitions and sale transactions undertaken by us, of which 1,108,928 shares have been returned to us
and are in the process of being canceled as of the date of this filing); (b) 104 holders of record of our 462,644 outstanding shares of Series A Preferred Stock; (c)
11 holders of record of our 3,277,856 outstanding shares of Series B Preferred Stock; (d) 17 holders of record of our 12,393,608 outstanding shares of Series B1
Preferred Stock; and (e) one holder of record of our 31,568 outstanding shares of Series C Preferred Stock.
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.
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.
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.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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”).
Effective on April 25, 2013, the Board of Directors adopted, subject to the ratification of our shareholders, the Company’s 2013 Stock Incentive Plan (the
“2013 Plan” and collectively with the 2008 Plan and the 2009 Plan, the “ Plans”), which was subsequently approved by the Company’s shareholders on June 7,
2013, which allowed 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. On July 20, 2015, the Board of Directors
approved an amendment to the 2013 Plan to increase by 2 million shares the number of shares available under the 2013 Plan, which was ratified by the
shareholders of the Company on September 16, 2015.
The following table provides information as of December 31, 2016 regarding the 2004 Plan, the 2007 Plan and the Plans (including individual
compensation arrangements), except as described below, under which equity securities are authorized for issuance:
Plan Category
Equity compensation plans approved by the
security holders
Equity compensation plans not approved by the
security holders
Total
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights*
Weighted-average exercise
price of outstanding
options, warrants and
rights*
2,583,750
—
2,583,750
$4.19
$—
Number of securities
available for future
issuance under equity
compensation plans
(excluding those in first
column)*
3,821,444
—
3,821,444
* Does not include securities available for future issuance under equity compensation plans approved by security holders and not approved by security holders
of World Waste, assumed in the Merger, which the Company does not plan to issue any additional securities in connection with.
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.
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; the total number of authorized shares of Vertex’s Series B
Preferred Stock is 10,000,000 (“Series B Preferred Stock ”); the total number of authorized shares of Vertex's Series B1 Preferred Stock is 17,000,000 (" Series B1
Preferred Stock") and the total number of authorized shares of Vertex’s Series C Convertible Preferred Stock is 44,000 (“ Series C Preferred Stock”).
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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 accrues a dividend, payable quarterly in arrears (based on calendar quarters), in the amount of 6% per annum of the
original issuance price of the Series B Preferred Stock ($3.10 per share).
The dividend is payable by the Company, at the Company’s election, in registered common stock of the Company (if available) or cash. In the event
dividends are paid in registered common stock of the Company, the number of shares payable will be calculated by dividing (a) the accrued dividend by (b) 90%
of the arithmetic average of the volume weighted average price (VWAP) of the Company’s common stock for the 10 trading days immediately prior to the
applicable date of determination (the “June 2015 Dividend Stock Payment Price ”). Notwithstanding the foregoing, in no event may the Company pay dividends in
common stock unless the applicable June 2015 Dividend Stock Payment Price is above $2.91. If the Company is prohibited from paying, or chooses not to pay,
the dividend in cash (due to contractual senior credit agreements or other restrictions) or is unable to pay the dividend in registered common stock, the dividend
will be paid in kind in Series B Preferred Stock shares at $3.10 per share.
The Series B Preferred Stock includes a liquidation preference (in the amount of $3.10 per share) which is junior to the Company’s Series A Preferred
Stock, ranks senior to the Company’s Series C Preferred Stock and ranks equally with the Series B1 Preferred Stock. The Series B Preferred Stock also ranks
junior to the Company’s credit facilities and other debt holders as provided in further detail in the designation of the Series B Preferred Stock (the “Series B
Designation”).
The Series B Preferred Stock prohibits us from (i) increasing or decreasing (other than by redemption or conversion (as described in the Series B
Designation)) the total number of authorized shares of Series B Preferred Stock (except to the extent required to issue payment-in-kind shares); (ii) re-issuing any
shares of Series B Preferred Stock converted or redeemed; (iii) creating, or authorizing the creation of, or issuing or obligating the Company to issue shares of,
any class or series of capital stock unless the same ranks junior to (and not pari passu with) the Series B Preferred Stock with respect to the distribution of assets
on the liquidation, dissolution or winding up of the Company, the payment of dividends and rights of redemption, or increase the authorized number of shares of
any additional class or series of capital stock unless the same ranks junior to (and not pari passu with) the Series B Preferred Stock with respect to the
distribution of assets on the liquidation, dissolution or winding up of the Company, the payment of dividends and rights of redemption; (iv) effecting an exchange,
reclassification, or cancellation of all or a part of the Series B Preferred Stock (except pursuant to the terms of the Series B Designation); (v) effecting an
exchange, or
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
creating a right of exchange, of all or part of the shares of another class of shares into shares of Series B Preferred Stock; (vi) issuing any shares of Series B
Preferred Stock other than pursuant to the Purchase Agreement or as payment-in-kind shares; (vii) altering or changing the rights, preferences or privileges of
the Series B Preferred Stock so as to affect adversely the shares of such series; or (viii) amending or waiving any provision of the Company’s Articles of
Incorporation or Bylaws relative to the Series B Preferred Stock so as to affect adversely the shares of Series B Preferred Stock in any material respect as
compared to holders of other series, in each case without the prior written consent of holders of Series B Preferred Stock holding a majority of the then
outstanding shares of Series B Preferred Stock.
The Series B Preferred Stock (including accrued and unpaid dividends) is convertible into shares of the Company’s common stock at the holder’s option
at $3.10 per share (initially a one-for-one basis). If the Company’s common stock trades at or above $6.20 per share for a period of 20 consecutive trading days,
the Company may at such time force conversion of the Series B Preferred Stock (including accrued and unpaid dividends) into common stock of the Company.
The Series B Preferred Stock votes together with the common stock on an as-converted basis, provided that each holder’s voting rights are subject to and
limited by the Series B Beneficial Ownership Limitation described below.
The Company has the option to redeem the outstanding shares of Series B Preferred Stock at $3.10 per share, plus any accrued and unpaid dividends
on such Series B Preferred Stock redeemed, at any time beginning on June 24, 2017, and the Company is required to redeem the Series B Preferred Stock at
$3.10 per share, plus any accrued and unpaid dividends, on June 24, 2020.
The Series B Preferred Stock contains a provision prohibiting the conversion of such Series B Preferred Stock into common stock of the Company, if
upon such conversion, the holder thereof would beneficially own more than 9.999% of the Company’s then outstanding common stock (the “Series B Beneficial
Ownership Limitation”). The Series B Beneficial Ownership Limitation does not apply to forced conversions undertaken by the Company pursuant to the terms of
the designation (summarized above).
Series B1 Preferred Stock
The Series B1 Preferred Stock is subject to the terms and conditions and has the rights and preferences set forth in the Certificate of Designation of
Vertex Energy, Inc. Establishing the Designation, Preferences, Limitations and Relative Rights of Its Series B1 Preferred Stock (the “Series B1 Designation”),
which was filed with the Secretary of State of Nevada on May 12, 2016. The Series B1 Preferred Stock accrues a dividend, payable quarterly in arrears (based
on calendar quarters), in the amount of 6% per annum of the original issuance price of the Series B1 Preferred Stock ($1.56 per share), provided that such
dividend increases to 9% if the Consolidated Adjusted EBITDA (defined below) targets described below are not met during the periods indicated below during
2016-2017, until the earlier of (a) the date the next target is met, or (b) June 30, 2018. “Consolidated Adjusted EBITDA” means the Company’s operating income,
plus (i) share-based compensation expense, (ii) depreciation and amortization, (iii) goodwill impairment charges, (iv) acquisition related expenses, (v)
nonrecurring restructuring charges, and (vi) other non-cash expenses or one-time items, all as calculated in accordance with United States generally accepted
accounting principles, as consistently applied by the Company.
The Consolidated Adjusted EBITDA targets are as follows:
Measurement Period
For the six months ending December 31, 2016
For the three months ending March 31, 2017
For the six months ending June 30, 2017
For the nine months ending September 30, 2017
For the twelve months ending December 31, 2017
Consolidated Adjusted EBITDA
Negative $1,000,000
$1,000,000
$3,500,000
$5,500,000
$7,500,000
The Consolidated Adjusted EBITDA target for the six months ending December 31, 2016 was met.
The dividend is payable by the Company, at the Company’s election, in registered common stock of the Company (if available) or cash, subject to the
terms of the Company’s senior loan documents. In the event dividends are paid in registered common stock of the Company, the number of shares payable will
be calculated by dividing (a) the accrued dividend by (b) 90% of the arithmetic average of the volume weighted average price (VWAP) of the Company’s common
stock for the 10 trading days immediately prior to the applicable date of determination (the “May 2016 Dividend Stock Payment Price ”). Notwithstanding the
foregoing, in no event may the Company pay dividends in common stock unless the applicable May 2016 Dividend Stock Payment
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Price is above $1.52. If the Company is prohibited from paying, or chooses not to pay, the dividend in cash (due to contractual senior credit agreements or other
restrictions) or is unable to pay the dividend in registered common stock, the dividend will be paid in-kind in additional shares of Series B1 Preferred Stock
shares based on a value of $1.56 per share.
The Series B1 Preferred Stock includes a liquidation preference (in the amount of $1.56 per share) which is junior to the Company’s Series A Preferred
Stock, ranks senior to the Company’s Series C Preferred Stock and ranks equally with the Series B Preferred Stock. The Series B1 Preferred Stock also ranks
junior to the Company’s credit facilities and other debt holders as provided in further detail in the Series B1 Designation.
The Series B1 Preferred Stock prohibits us from (i) increasing or decreasing (other than by redemption or conversion (as described in the Series B1
Designation)) the total number of authorized shares of Series B1 Preferred Stock (except to the extent required to issue payment-in-kind shares); (ii) re-issuing
any shares of Series B1 Preferred Stock converted or redeemed; (iii) creating, or authorizing the creation of, or issuing or obligating the Company to issue shares
of, any class or series of capital stock unless the same ranks junior to (and not pari passu with) the Series B1 Preferred Stock with respect to the distribution of
assets on the liquidation, dissolution or winding up of the Company, the payment of dividends and rights of redemption, or increase the authorized number of
shares of any additional class or series of capital stock unless the same ranks junior to (and not pari passu with) the Series B1 Preferred Stock with respect to the
distribution of assets on the liquidation, dissolution or winding up of the Company, the payment of dividends and rights of redemption; (iv) issuing, incurring or
obligating the Company to issue or incur any indebtedness that is convertible into, or exchangeable for, any equity security of the Company or instruments
derivative of any equity security of the Company; (v) granting any rights to require a mandatory repurchase, retirement or redemption by the Company of any of
the Company’s equity securities or instruments derivative of its equity securities on or prior to June 24, 2020, or issuing, incurring or obligating the Company to
issue or incur, any indebtedness with a maturity date on or prior to June 24, 2020, that is convertible into, or exchangeable for, equity securities or instruments
derivative of the Company’s equity securities; (vi) effecting an exchange, reclassification, or cancellation of all or a part of the Series B1 Preferred Stock (except
pursuant to the terms of the Series B1 Designation); (vii) effecting an exchange, or creating a right of exchange, of all or part of the shares of another class of
shares into shares of Series B1 Preferred Stock; (viii) issuing any shares of Series B1 Preferred Stock other than pursuant to the Purchase Agreement or as
payment-in-kind shares; (ix) altering or changing the rights, preferences or privileges of the Series B1 Preferred Stock so as to affect adversely the shares of such
series; or (x) amending or waiving any provision of the Company’s Articles of Incorporation or Bylaws relative to the Series B1 Preferred Stock so as to affect
adversely the shares of Series B1 Preferred Stock in any material respect as compared to holders of other series, in each case without the prior written consent
of holders of Series B1 Preferred Stock holding a majority of the then outstanding shares of Series B1 Preferred Stock.
The Series B1 Preferred Stock (including accrued and unpaid dividends) is convertible into shares of the Company’s common stock at the holder’s option
at any time after closing on a one-for-one basis. If the Company’s common stock trades at or above $3.90 per share for a period of 20 consecutive trading days
at any time, the Company may at such time force conversion of the Series B1 Preferred Stock (including accrued and unpaid dividends) into common stock of the
Company.
The Series B1 Preferred Stock votes together with the common stock on an as-converted basis, provided that each holder’s voting rights are subject to
and limited by the Series B1 Beneficial Ownership Limitation described below.
The Company has the option to redeem the outstanding shares of Series B1 Preferred Stock at $1.716 per share, plus any accrued and unpaid dividends
on such Series B1 Preferred Stock redeemed, at any time beginning on June 20, 2017 (the two year anniversary of the closing of the Company’s June 2015
offering of Series B Preferred Stock) and the Company is required to redeem the Series B1 Preferred Stock at $1.56 per share, plus any accrued and unpaid
dividends on June 24, 2020 (the five year anniversary of the closing of the Company’s June 2015 offering of Series B Preferred Stock).
The Series B1 Preferred Stock contains a provision prohibiting the conversion of the Series B1 Preferred Stock into common stock of the Company, if
upon such conversion or exercise, as applicable, the holder thereof would beneficially own more than 9.999% (provided that certain holders of the Series B1
Preferred Stock have contractually agreed to a lower conversion limit of 4.999%) of the Company’s then outstanding common stock (the “Series B1 Beneficial
Ownership Limitation”). The Series B1 Beneficial Ownership Limitation does not apply to forced conversions undertaken by the Company pursuant to the terms of
the Series B1 Designation (summarized above).
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Series C Convertible Preferred Stock
The Series C Preferred Stock does not accrue a dividend, but has participation rights on an as-converted basis, to any dividends paid on the Company’s
common stock (other than dividends paid solely in common stock). Each Series C Preferred Stock share has a $100 face value, and a liquidation preference (in
the amount of $100 per share) which is junior to the Company’s other outstanding shares of preferred stock, senior credit facilities and other debt holders as
provided in further detail in the designation, but senior to the common stock.
The Series C Preferred Stock is convertible into shares of the Company’s common stock at the holder’s option at any time at $1.00 per share (initially a
100:1 basis (subject to adjustments for stock splits and recapitalizations)). The Series C Preferred Stock votes together with the common stock on an as-
converted basis, provided that each holder’s voting rights are subject to and limited by the Series C Beneficial Ownership Limitation described below and provided
further that notwithstanding any of the foregoing, solely for purposes of determining the Voting Rights, the Voting Rights accorded to such Series C Convertible
Preferred Stock will be determined as if converted at $1.05 per share ( the market value of the common stock as of the close of trading on the day prior to
the original issuance date of the Series C Preferred Stock), and subject to equitable adjustment as discussed in the designation . There are no redemption rights
associated with the Series C Preferred Stock.
The Series C Preferred Stock contains a provision prohibiting the conversion of the Series C Preferred Stock into common stock of the Company, if upon
such conversion or exercise, as applicable, the holder thereof would beneficially own more than 4.999% of the Company’s then outstanding common stock (the
“Series C Beneficial Ownership Limitation”). The Series C Beneficial Ownership Limitation may be increased up and down on a per holder basis, with 61 days
prior written notice from any holder, provided the Series C Beneficial Ownership Limitation may never be higher than 9.999%.
So long as any shares of Series C Preferred Stock are outstanding, we are prohibited from undertaking any of the following without first obtaining the
approval of the holders of a majority of the outstanding shares of Series C Preferred Stock: (a) increasing or decreasing (other than by redemption or conversion)
the total number of authorized shares of Series C Preferred Stock; (b) re-issuing any shares of Series C Preferred Stock converted; (c) creating, or authorizing
the creation of, or issuing or obligating the Company to issue shares of, any class or series of capital stock unless the same ranks junior to (and not pari passu
with) the Series C Preferred Stock with respect to the distribution of assets on the liquidation, dissolution or winding up of the Company, or increasing the
authorized number of shares of any additional class or series of capital stock unless the same ranks junior to (and not pari passu with) the Series C Preferred
Stock with respect to the distribution of assets on the liquidation, dissolution or winding up of the Company; (d) effecting an exchange, reclassification, or
cancellation of all or a part of the Series C Preferred Stock (except pursuant to the terms of the designation); (e) effecting an exchange, or creating a right of
exchange, of all or part of the shares of another class of shares into shares of Series C Preferred Stock (except pursuant to the terms of the designation); (f)
issuing any additional shares of Series C Preferred Stock; (g) altering or changing the rights, preferences or privileges of the shares of Series C Preferred Stock
so as to affect adversely the shares of such series; or (h) amending or waiving any provision of the Company’s Articles of Incorporation or Bylaws relative to the
Series C Preferred Stock so as to affect adversely the shares of Series C Preferred Stock in any material respect as compared to holders of other series of
shares.
Recent Sales of Unregistered Securities
For the period from September 30, 2015 to December 31, 2015, a total of approximately $379,518 of dividends accrued on our outstanding Series B
Preferred Stock. We were prohibited from paying such dividends in shares of common stock because the applicable June 2015 Dividend Stock Payment Price
was below $2.91. Pursuant to the terms of our Goldman Credit Agreement and Restated Goldman Credit Agreement (both described in greater detail below
under “Part II. - Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Credit and
Guaranty Agreement with Goldman Sachs Bank USA”) we were prohibited from paying the dividend in cash and therefore we paid the accrued dividends in-kind
by way of the issuance of 122,425 restricted shares of Series B Preferred Stock pro rata to each of the then holders of our Series B Preferred Stock in January
2016. If converted in full, the 122,425 shares of restricted Series B Preferred Stock would convert into 122,425 shares of our common stock. As the issuance of
the Series B Preferred Stock in-kind in satisfaction of the dividends did not involve a “sale” of securities under Section 2(a)(3) of the Securities Act, we believe that
no registration of such securities, or exemption from registration for such securities, was required under the Securities Act. Notwithstanding the above, to the
extent such shares are deemed “sold or offered”, we claim an exemption from registration pursuant to Section 4(a)(2) and/or Rule 506 of Regulation D of the
Securities Act, since the transaction did not involve a public offering, the recipients were “accredited investors”, and acquired the securities for investment only
and not with a view towards, or for resale in connection with, the public sale or distribution thereof. The securities are subject to transfer restrictions, and the
certificates evidencing the securities contain an appropriate legend stating that such securities have not been registered under the Securities Act and may not be
offered or sold absent registration or pursuant to an exemption therefrom. The securities were not registered under the Securities
53
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Act and such securities may not be offered or sold in the United States absent registration or an exemption from registration under the Securities Act and any
applicable state securities laws.
Effective on or around January 21, 2016, we paid the January 2016 rent due pursuant to the terms of the Bango Lease in shares of our common stock,
pursuant to the terms of such lease, which allowed us to pay 110% of the rent which would otherwise be due in cash (i.e., $268,400 of share based rent
compared to $244,000 of cash based rent), as calculated using the volume weighted average price (“VWAP”) of our common stock for the 10-day period
preceding the first day of each month, which VWAP for the month of January 2016 was $1.10 per share. As such, we issued the then owner of Bango Oil, Fox
Encore, an aggregate of 244,000 shares of our restricted common stock in lieu of cash rent due pursuant to the Bango Lease for the month of January 2016. We
claim an exemption from registration for the issuance and sale of such shares pursuant to Section 4(a)(2) and/or Rule 506 of Regulation D of the Securities Act,
since the foregoing issuance did not involve a public offering, the recipient was an “accredited investor”, and acquired the securities for investment only and not
with a view towards, or for resale in connection with, the public sale or distribution thereof. The securities were offered without any general solicitation by us or our
representatives. No underwriters or agents were involved in the foregoing issuance and we paid no underwriting discounts or commissions. The securities are
subject to transfer restrictions, and the certificates evidencing the securities contain an appropriate legend stating that such securities have not been registered
under the Securities Act and may not be offered or sold absent registration or pursuant to an exemption therefrom. The securities were not registered under the
Securities Act and such securities may not be offered or sold in the United States absent registration or an exemption from registration under the Securities Act
and any applicable state securities laws.
As described above under “Part I - Item 1. Business - 2016 Material Events - Purchase and Sale Agreement, Churchill County, Nevada Plant ”, in
connection with the closing of the Sale Agreement, we placed $1.5 million in cash and $1 million worth of our common stock (1,108,928 shares) into escrow with
50% of the shares to be released 12 months following the closing and the remainder of the shares held in escrow to be released 18 months after the closing, in
order to satisfy any indemnification claims made by the buyer pursuant to the terms of the Sale Agreement, which shares have been returned to us and are in the
process of being canceled as of the date of this filing. On June 30 and December 31 of each year that any of our shares of common stock are in escrow, in the
event the value of the shares held in escrow is less than $1 million, based on the then market price of our common stock, we are required to increase the number
of shares of common stock held in escrow to total $1 million in aggregate value. To the extent such shares are deemed “sold or offered”, we claim an exemption
from registration pursuant to Section 4(a)(2) and/or Rule 506 of Regulation D of the Securities Act, since the transaction did not involve a public offering, the
recipient was an “accredited investor”, and will acquire the securities for investment only and not with a view towards, or for resale in connection with, the public
sale or distribution thereof. The securities are subject to transfer restrictions, and the certificates evidencing the securities contain an appropriate legend stating
that such securities have not been registered under the Securities Act and may not be offered or sold absent registration or pursuant to an exemption therefrom.
The securities were not registered under the Securities Act and such securities may not be offered or sold in the United States absent registration or an
exemption from registration under the Securities Act and any applicable state securities laws.
As described above under “Part I - Item 1. Business - 2016 Material Events - Subscription Agreement ”, we sold 44,000 shares of Series C Preferred
Stock to Fox Encore in consideration for $4 million, which convert into common stock on a 100-for-1 basis, and which if fully converted would convert into
4,400,000 shares of common stock. We claim an exemption from registration for the issuance and sale of such shares pursuant to Section 4(a)(2) and/or Rule
506 of Regulation D of the Securities Act, since the foregoing issuance did not involve a public offering, the recipient was an “accredited investor”, and acquired
the securities for investment only and not with a view towards, or for resale in connection with, the public sale or distribution thereof. The securities were offered
without any general solicitation by us or our representatives. No underwriters or agents were involved in the foregoing issuance and we paid no underwriting
discounts or commissions. The securities are subject to transfer restrictions, and the certificates evidencing the securities contain an appropriate legend stating
that such securities have not been registered under the Securities Act and may not be offered or sold absent registration or pursuant to an exemption therefrom.
The securities were not registered under the Securities Act and such securities may not be offered or sold in the United States absent registration or an
exemption from registration under the Securities Act and any applicable state securities laws.
In February 2016, a holder of Series A Convertible Preferred Stock of the Company converted 120,227 shares of our Series A Convertible Preferred
Stock into 120,227 shares of our common stock. All of the shares of common stock issuable upon conversion of the Series A Preferred Stock shares were
exempt from registration pursuant to an exemption from registration afforded by Section 3(a)(9) and 3(a)(10) of the Securities Act.
For the period from December 31, 2015 to March 31, 2016, a total of approximately $373,500 of dividends accrued on our outstanding Series B Preferred
Stock. We were prohibited from paying such dividends in shares of common stock because the applicable June 2015 Dividend Stock Payment Price was below
$2.91. Pursuant to the terms of our Goldman Credit Agreement with our senior lender, we were prohibited from paying the dividend in cash and therefore we paid
the accrued dividends in-kind
54
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
by way of the issuance of 124,258 restricted shares of Series B Preferred Stock pro rata to each of the then holders of our Series B Preferred Stock in April 2016.
If converted in full, the 124,258 shares of restricted Series B Preferred Stock would convert into 124,258 shares of our common stock. As the issuance of the
Series B Preferred Stock in-kind in satisfaction of the dividends did not involve a “sale” of securities under Section 2(a)(3) of the Securities Act, we believe that no
registration of such securities, or exemption from registration for such securities, was required under the Securities Act. Notwithstanding the above, to the extent
such shares are deemed “sold or offered”, we claim an exemption from registration pursuant to Section 4(a)(2) and/or Rule 506 of Regulation D of the Securities
Act, since the transaction did not involve a public offering, the recipients were “accredited investors”, and acquired the securities for investment only and not with
a view towards, or for resale in connection with, the public sale or distribution thereof. The securities are subject to transfer restrictions, and the certificates
evidencing the securities contain an appropriate legend stating that such securities have not been registered under the Securities Act and may not be offered or
sold absent registration or pursuant to an exemption therefrom. The securities were not registered under the Securities Act and such securities may not be
offered or sold in the United States absent registration or an exemption from registration under the Securities Act and any applicable state securities laws.
In May 2016, we sold the May 2016 Units (including the shares of Series B1 Preferred Stock and the May 2016 Warrants) to the May 2016 Investors
under the May 2016 Purchase Agreement (each as described in greater detail below under “Part II. - Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources - Unit Offerings”) in transactions exempt from registration under the Securities Act, in
reliance on Section 4(a)(2) thereof and Rule 506(b) of Regulation D of the Securities Act. Each of the Investors represented that it is an accredited investor within
the meaning of Rule 501(a) of Regulation D, and acquired the May 2016 Units for investment only and not with a view towards, or for resale in connection with,
the public sale or distribution thereof. The Units were offered without any general solicitation by the Company or its representatives. The Units were not
registered under the Securities Act and such securities may not be offered or sold in the United States absent registration or an exemption from registration
under the Securities Act and any applicable state securities laws. If converted in full, the 12,403,683 shares of Series B1 Preferred Stock would convert into
12,403,683 shares of our common stock. If exercised in full, the holders of the warrants to purchase 3,100,926 shares of common stock would be due 3,100,926
shares of common stock upon such exercise.
For the period from April 1, 2016 to June 30, 2016, a total of approximately $264,074 of dividends accrued on our outstanding Series B Preferred Stock
and for the period from May 13, 2016 to June 30, 2016, a total of approximately $145,123 of dividends accrued on our outstanding Series B1 Preferred Stock. We
were prohibited from paying such dividends in shares of common stock and in cash and therefore we paid the accrued dividends in-kind by way of the issuance
of 62,822 restricted shares of Series B Preferred Stock pro rata to each of the then holders of our Series B Preferred Stock in July 2016 and the issuance of
97,875 restricted shares of Series B1 Preferred Stock pro rata to each of the then holders of our Series B1 Preferred Stock in July 2016. If converted in full, the
62,822 shares of Series B Preferred Stock would convert into 62,822 shares of common stock and the 97,875 shares of Series B1 Preferred Stock would convert
into 97,875 shares of common stock. As the issuance of the Series B Preferred Stock and Series B1 Preferred Stock in-kind in satisfaction of the dividends did
not involve a “sale” of securities under Section 2(a)(3) of the Securities Act, we believe that no registration of such securities, or exemption from registration for
such securities, was required under the Securities Act. Notwithstanding the above, to the extent such shares are deemed “sold or offered”, we claim an
exemption from registration pursuant to Section 4(a)(2) and/or Rule 506 of Regulation D of the Securities Act, since the transaction did not involve a public
offering, the recipients were “accredited investors”, and acquired the securities for investment only and not with a view towards, or for resale in connection with,
the public sale or distribution thereof. The securities are subject to transfer restrictions, and the certificates evidencing the securities contain an appropriate
legend stating that such securities have not been registered under the Securities Act and may not be offered or sold absent registration or pursuant to an
exemption therefrom . The securities were not registered under the Securities Act and such securities may not be offered or sold in the United States absent
registration or an exemption from registration under the Securities Act and any applicable state securities laws.
For the period from July 1, 2016 to September 30, 2016, a total of approximately $214,227 of dividends accrued on our outstanding Series B Preferred
Stock and for the period from July 1, 2016 to September 30, 2016, a total of approximately $290,246 of dividends accrued on our outstanding Series B1 Preferred
Stock. We were prohibited from paying such dividends in shares of common stock and in cash and therefore we paid the accrued dividends in-kind by way of the
issuance of 73,437 restricted shares of Series B Preferred Stock pro rata to each of the then holders of our Series B Preferred Stock in October 2016 and the
issuance of 187,534 restricted shares of Series B1 Preferred Stock pro rata to each of the then holders of our Series B1 Preferred Stock in October 2016. If
converted in full, the 73,437 shares of Series B Preferred Stock would convert into 73,437 shares of common stock and the 187,534 shares of Series B1
Preferred Stock would convert into 187,534 shares of common stock. As the issuance of the Series B Preferred Stock and Series B1 Preferred Stock in-kind in
satisfaction of the dividends did not involve a “sale” of securities under Section 2(a)(3) of the Securities Act, we believe that no registration of such securities, or
exemption from registration for such securities, was required under the Securities Act. Notwithstanding the above, to the extent such shares are deemed “sold or
offered”, we claim an exemption from registration pursuant to Section 4(a)(2) and/or Rule 506 of Regulation D of the Securities
55
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Act, since the transaction did not involve a public offering, the recipients were “ accredited investors”, and acquired the securities for investment only and not with
a view towards, or for resale in connection with, the public sale or distribution thereof. The securities are subject to transfer restrictions, and the certificates
evidencing the securities contain an appropriate legend stating that such securities have not been registered under the Securities Act and may not be offered or
sold absent registration or pursuant to an exemption therefrom. The securities were not registered under the Securities Act and such securities may not be
offered or sold in the United States absent registration or an exemption from registration under the Securities Act and any applicable state securities laws.
In October 2016, a holder of our Series B1 Convertible Preferred Stock converted 403,217 shares of our Series B1 Convertible Preferred Stock into
403,217 shares of our common stock.
In November 2016, a holder of our Series B Convertible Preferred Stock converted 1,739,272 shares of our Series B Convertible Preferred Stock into
1,739,272 shares of our common stock.
We claim an exemption from registration provided by Section 3(a)(9) of the Securities Act for such issuances, as the securities were exchanged by us
with our existing security holders in a transaction where no commission or other remuneration was paid or given directly or indirectly for soliciting such exchange.
For the period from October 1, 2016 to December 31, 2016, a total of approximately $214,227 of dividends accrued on our outstanding Series B Preferred
Stock and for the period from October 1, 2016 to December 31, 2016, a total of approximately $290,246 of dividends accrued on our outstanding Series B1
Preferred Stock. We were prohibited from paying such dividends in shares of common stock and in cash and therefore we paid the accrued dividends in-kind by
way of the issuance of 48,447 restricted shares of Series B Preferred Stock pro rata to each of the then holders of our Series B Preferred Stock in January 2017
and the issuance of 184,297 restricted shares of Series B1 Preferred Stock pro rata to each of the then holders of our Series B1 Preferred Stock in October 2016.
If converted in full, the 48,447 shares of Series B Preferred Stock would convert into 48,447 shares of common stock and the 184,297 shares of Series B1
Preferred Stock would convert into 184,297 shares of common stock. As the issuance of the Series B Preferred Stock and Series B1 Preferred Stock in-kind in
satisfaction of the dividends did not involve a “sale” of securities under Section 2(a)(3) of the Securities Act, we believe that no registration of such securities, or
exemption from registration for such securities, was required under the Securities Act. Notwithstanding the above, to the extent such shares are deemed “sold or
offered”, we claim an exemption from registration pursuant to Section 4(a)(2) and/or Rule 506 of Regulation D of the Securities Act, since the transaction did not
involve a public offering, the recipients were “accredited investors”, and acquired the securities for investment only and not with a view towards, or for resale in
connection with, the public sale or distribution thereof. The securities are subject to transfer restrictions, and the certificates evidencing the securities contain an
appropriate legend stating that such securities have not been registered under the Securities Act and may not be offered or sold absent registration or pursuant to
an exemption therefrom. The securities were not registered under the Securities Act and such securities may not be offered or sold in the United States absent
registration or an exemption from registration under the Securities Act and any applicable state securities laws.
In January 2017, two holders of our Series B1 Convertible Preferred Stock converted 66,564 and 10,000 shares, respectively, of our Series B1
Convertible Preferred Stock into 66,564 and 10,000 shares of our common stock, respectively.
In January 2017, a holder of our Series A Convertible Preferred Stock converted 30,072 shares of our Series A Convertible Preferred Stock into 30,072
shares of our common stock.
We claim an exemption from registration provided by Section 3(a)(9) of the Securities Act for such issuances, as the securities were exchanged by us
with our existing security holders in a transaction where no commission or other remuneration was paid or given directly or indirectly for soliciting such exchange.
Use of Proceeds From Sale of Registered Securities
None.
Issuer Purchases of Equity Securities
None.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Item 6. Selected Financial Data
Our selected consolidated financial data shown below should be read together with “Part II” - “Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and our consolidated financial statements and respective notes included in “ Part II” - “Item 8. Financial Statements
and Supplementary Data”. The data shown below is not necessarily indicative of results to be expected for any future period.
2016
2015
2014
2013
2012
Years Ended December 31,
Statement of Operations Data:
Revenues
Income (loss) from operations
Basic net income (loss) per share
Diluted net income (loss) per share
Weighted average number of basic common
shares outstanding
Weighted average number of diluted common
shares outstanding
$
$
98,078,914 $
(10,112,514) $
146,942,461 $
(14,093,041) $
258,904,867 $
(10,494,621) $
161,967,252 $
7,051,203 $
(0.51)
(0.51)
(0.86)
(0.86)
(0.23)
(0.23)
0.44
0.39
134,573,243
2,391,250
0.30
0.25
30,520,820
28,181,096
23,807,780
17,830,194
12,138,229
30,520,820
28,181,096
23,807,780
20,182,829
14,866,134
Consolidated Balance Sheet Data
Cash and cash equivalents
Working capital (deficit)
Total assets
Long-term obligations
Total liabilities
Total stockholders’ equity
2016
2015
2014
2013
2012
Years Ended December 31,
$
$
$
$
$
$
1,701,435 $
(1,268,192) $
86,985,968 $
6,214,103 $
28,667,747 $
41,230,119 $
765,364 $
(10,498,637) $
93,644,816 $
7,088,263 $
40,753,674 $
40,935,935 $
6,017,076 $
(29,327,453) $
133,822,231 $
12,125,574 $
75,202,259 $
58,619,972 $
2,678,628 $
8,042,589 $
64,546,356 $
10,157,101 $
26,210,133 $
38,336,223 $
807,940
3,712,745
49,102,377
18,083,457
28,702,020
20,400,357
The key operational issue contributing to the differences between 2016 and 2015 was the steady decline of commodity prices. This resulted in lower 2015
revenues and cost of goods sold without a corresponding decrease in our fixed costs. During the first half of 2016, other operating differences between 2016 and
2015, were the sale of the Bango assets during the first quarter of 2016. In addition, we processed fewer barrels due to the fire that occurred at our Heartland
Refinery during the second quarter of 2016.
See "Note 16, Disposition", in the Notes to the Consolidated Financial Statements in “ Part II. Item 8. Financial Statements and Supplementary Data” of
this Annual Report on Form 10-K for a full description of a disposition which affected the comparability of the selected financial data, which is incorporated herein
by reference.
57
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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. We believe that the expansion of our facilities and our technology, and investments in additional technologies, will enable us to upgrade
feedstock into end products, such as lubricating base oil, that command higher market prices than the current re-refined products we produce.
Pursue Selective Strategic Relationships or Acquisitions. We plan to grow market share by consolidating feedstock supply through partnering with or
acquiring collection and aggregation assets. Such acquisitions and/or partnerships could increase our revenue and provide better control over the quality
and quantity of feedstock available for resale and/or upgrading as well as providing additional locations for the implementation of TCEP, if we deem such
commercially reasonable. 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.
RESULTS OF OPERATIONS
Description of Material Financial Line Items:
Revenues
We generate revenues from three existing operating divisions as follows:
BLACK OIL - Revenues for our Black Oil division are comprised primarily of product sales from our re-refineries and feedstock sales (used motor oil)
which are purchased from generators of used motor oil such as oil change shops and garages, as well as a network of local and regional suppliers. Volumes are
consolidated for efficient delivery and then sold to third-party re-refiners and fuel oil blenders for the export market. In addition, through used oil re-refining, we re-
refine used oil into different commodity products. The Houston, Texas TCEP facility finished product is then sold by barge as a fuel oil cutterstock. Through the
operations at our Marrero, Louisiana facility, we produce a Vacuum Gas Oil (VGO) product from used oil re-refining which is then sold via barge to crude
refineries to be utilized as an intermediate feedstock in the refining process. Through the operations at our Columbus, Ohio facility we produce a base oil finished
product which is then sold via truck or rail car to end users for blending, packaging and marketing of lubricants.
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
58
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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.
RECOVERY - The Recovery division is a generator solutions company for the proper recovery and management of hydrocarbon streams. This division
also provides dismantling, demolition, decommission and marine salvage services at industrial facilities. We own and operate a fleet of trucks and other vehicles
used for shipping and handling equipment and scrap materials.
Our revenues are affected by changes in various commodity prices including crude oil, natural gas, #6 oil and metals.
Cost of Revenues
BLACK OIL - Cost of revenues for our Black Oil 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.
RECOVERY - The Recovery division incurs cost of revenues relating to the purchase of hydrocarbon products, purchasing and receiving costs,
inspection, demolition and transporting of metals and other salvage and materials. Cost of revenues also includes broker’s fees, inspection and transportation
costs.
Our cost of revenues are affected by changes in various commodity indices, including crude oil, natural gas, #6 oil and metals. For example, if the price
for crude oil increases, the cost of solvent additives used in the production of blended oil products, and fuel cost for transportation cost from third party providers
will generally increase. Similarly, if the price of crude oil falls, these costs may also decline.
General and Administrative Expenses
Our general and administrative expenses consist primarily of salaries and other employee-related benefits for executive, administrative, legal, financial
and information technology personnel, as well as outsourced and professional services, rent, utilities, and related expenses at our headquarters, as well as certain
taxes.
Depreciation and Amortization Expenses
Our depreciation and amortization expenses are primarily related to the property, plant and equipment and intangible assets acquired in connection with
the Holdings, E-Source, Omega Refining acquisitions and Warren Ohio Holdings Co., LLC f/k/a Heartland Group Holdings, LLC ("Heartland") asset purchase,
described in greater detail above under “Part I - Item 1. Business - Prior Material Acquisitions ”.
59
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2016 COMPARED TO THE THREE MONTHS ENDED DECEMBER 31,
2015
Set forth below are our results of operations for the three months ended December 31, 2016, as compared to the same period in 2015.
Revenues
$
31,055,936 $
20,875,827 $
10,180,109
Three Months Ended December 31,
2016
2015
$ Change
% Change
Cost of revenues
Gross profit (loss)
25,758,117
20,497,691
5,260,426
5,297,819
378,136
4,919,683
Reduction of contingent liability
—
(6,069,000)
6,069,000
Selling, general and administrative expenses
(exclusive of merger related expenses)
4,804,400
6,982,422
(2,178,022)
Depreciation and amortization
1,569,414
1,920,416
(351,002)
Acquisition related expenses
64,857
11,584
53,273
Total selling, general and administrative
expenses
6,438,671
2,845,422
3,593,249
Income (loss) from operations
(1,140,852)
(2,467,286)
1,326,434
Provision for doubtful accounts
Goodwill Impairment
Interest Income
Gain (loss) on sale of assets
Gain (loss) on change in derivative liability
Gain (loss) on futures liability
Interest Expense
Total other income (expense)
—
—
1,522
(1,323)
(674,309)
(196,560)
(373,900)
(1,244,570)
1,995,180
(4,922,353)
(4,475)
92,261
2,844,430
155,660
(728,780)
(568,077)
(1,995,180)
4,922,353
5,997
(93,584)
(3,518,739)
(352,220)
354,880
(676,493)
Income (loss) before income tax
(2,385,422)
(3,035,363)
649,941
49 %
26 %
1,301 %
100 %
(31)%
(18)%
460 %
126 %
54 %
(100)%
(100)%
134 %
(101)%
(124)%
(226)%
(49)%
(119)%
21 %
— %
Income tax (expense) benefit
Net Income (loss) attributable to non-
controlling interest
Net income (loss) attributable to Vertex
Energy, Inc.
—
13,372
—
—
—
13,372
100 %
$
(2,398,794) $
(3,035,363) $
636,569
21 %
60
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Each of our segments' gross profit during the three months ended December 31, 2016 and 2015 were as follows:
Black Oil
Total revenue
Total cost of revenue
Gross profit (loss)
Refining And Marketing
Total revenue
Total cost of revenue
Gross profit (loss)
Recovery
Total revenue
Total cost of revenue
Gross profit (loss)
Three Months Ended December 31,
2016
2015
$ Change
% Change
23,757,821 $
19,123,192
4,634,629 $
17,004,934 $
17,244,210
(239,276) $
6,752,887
1,878,982
4,873,905
40 %
11 %
2,037 %
Three Months Ended December 31,
2016
2015
$ Change
% Change
3,168,730 $
2,893,913
274,817 $
2,687,922 $
2,270,299
417,623 $
480,808
623,614
(142,806)
Three Months Ended December 31,
2016
2015
$ Change
% Change
4,129,385 $
3,741,012
388,373 $
1,182,971 $
983,182
199,789 $
2,946,414
2,757,830
188,584
18 %
27 %
(34)%
249 %
281 %
94 %
$
$
$
$
$
$
Total revenues increased 49% for the fourth quarter of 2016, compared to the same period in 2015, due primarily to higher commodity prices. as well as
increased volumes of product produced during the fourth quarter 2016 compared to the same period in 2015. Total volume increased 21%; however gross profit
increased 1,301% for the three months ended December 31, 2016 compared to 2015. Additionally, our per barrel margin increased 1,061% relative to the three
months ended December 31, 2015. The majority of this increase was the result of the adjustments in prices of feedstock (described below) during the fourth
quarter of 2016 which resulted in positive gross profit during this period. In our collection division we successfully initiated a charge for services program. As a
result of this program we currently have customers who are charged for each service performed and others who are charged a monthly fee for as many services
performed in that month. The combination of our fee structure change along with our increased third party supply we were able to make progress in lowering our
cost of feedstock during the fourth quarter.
Our Black Oil division’s volume increased approximately 14% during the three months ended December 31, 2016 compared to the same period in 2015.
This increase was due to the increase in production at our Marrero and Heartland facilities during the three months ended December 31, 2016. Overall volume
for the Refining and Marketing division increased 22% during the three month period ended December 31, 2016 as compared to the same period in 2015. This
division experienced a decrease in production of 3% for its gasoline blendstock for the three months ended December 31, 2016, compared to the same period in
2015. Our fuel oil cutter volumes increased 111% for the three months ended December 31, 2016, compared to the same period in 2015. Our pygas volumes
increased 2% for the three months ended December 31, 2016 as compared to the same period in 2015.
We experienced no change in the volume of our TCEP refined product during the three months ended December 31, 2016, compared to the same
period in 2015. We did not produce any TCEP finished product during the three months ended December 31, 2016 nor during the same period in 2015.
During the three months ended December 31, 2016, the processing costs for our Refining and Marketing business located at KMTEX were $479,608.
Revenues for the same period were $3,168,730 while loss from operations was $346,470. During the three months ended December 31, 2015, the processing
costs were $415,725. Revenues for the same period were $2,687,922 while loss from operations was $259,886.
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In addition, commodity prices increased approximately 38% for the three months ended December 31, 2016, compared to the same period in 2015. The
average posting (U.S. Gulfcoast Residual Fuel No. 6 3%) for the three months ended December 31, 2016 increased $11.38 per barrel from a three month
average of $29.78 per barrel during the three months ended December 31, 2015 to $41.16 per barrel during the three months ended December 31, 2016.
Overall gross profit increased 1,301% and our margin per barrel increased approximately 1,061% for the three months ended December 31, 2016,
compared to the same period in 2015. This increase was a result of the improvement in our feedstock pricing, which is a result of various initiatives during the
period pursuant to which we were able to lower our costs of procuring used motor oil during the three months ended December 31, 2016. In our street collections
and third party purchasing we were focused to lower the prices paid to generators and suppliers for used motor oil during 2016. Additionally, our street collections
operations changed to a charge for services model where we implemented service fees for the handling of used motor oil, the managing of used oil filters, and
various other services performed by our collection division during the second half of 2016 compared to this being a cost and us paying for these services to be
done in prior periods. With the gradual increase in commodity prices during this period, along with our change to service charges model helped to offset the lower
finished product values.
We had selling, general and administrative expenses (exclusive of merger related expenses and depreciation and amortization) of $4,804,400 for the
three months ended December 31, 2016, compared to $6,982,422 from the prior year's period, a decrease of $2,178,022 or 31% from the prior period, due to a
decrease in overall administrative expenses. We incurred an additional $64,857 of acquisition related expenses during the three months ended December 31,
2016 related to the acquisition of a collection route consisting of collecting, shipping and selling used oil, oil filters, antifreeze and other related services in the
state of Louisiana in 2016. We recognized a $4,922,353 Goodwill Impairment in 2015, which eliminated the goodwill balance. This result occurred primarily due
to the adverse impact of declining oil prices on current and anticipated future oil activity. Of the total, $1,367,838 relates to our Recovery segment and $3,554,515
relates to our Black Oil segment. Our Refining and Marketing segment has no goodwill recorded.
We had loss before income taxes of $2,385,422 for the three months ended December 31, 2016 compared to a loss before income taxes of $3,035,363
for the three months ended December 31, 2015.
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RESULTS OF OPERATIONS FOR THE FISCAL YEAR ENDED DECEMBER 31, 2016 COMPARED TO THE FISCAL YEAR ENDED DECEMBER 31,
2015
Revenues
Cost of revenues
Gross profit
Year Ended December 31,
2016
2015
$ Change
% Change
$
98,078,914
$
146,942,461
$
(48,863,547)
81,759,814
136,246,273
(54,486,459)
16,319,100
10,696,188
5,622,912
(33)%
(40)%
53 %
Reduction of contingent liability
—
(6,069,000)
6,069,000
100 %
Selling, general and administrative expenses (exclusive of merger related
expenses)
19,966,426
24,046,464
(4,080,038)
Depreciation and amortization
6,277,215
6,636,593
(359,378)
Acquisition related expenses
187,973
175,172
12,801
Total selling, general and administrative expenses
26,431,614
24,789,229
1,642,385
Income (loss) from operations
(10,112,514)
(14,093,041)
3,980,527
Other Income (expense)
Provision for doubtful accounts
Goodwill impairment
Other income
Gain (loss) on sale of assets
Gain (loss) on change in value of derivative liability
Gain (loss) on futures contracts
Interest expense
Total other income (expense)
—
—
5,974
9,631,712
49,876
(548,380)
(3,094,956)
6,044,226
(654,820)
(4,922,353)
(4,446)
13,944
5,479,463
551,090
(3,580,726)
(3,117,848)
654,820
4,922,353
10,420
9,617,768
(5,429,587)
(1,099,470)
485,770
9,162,074
Income (loss) before income tax
(4,068,288)
(17,210,889)
13,142,601
Income tax benefit (expense)
117,646
(5,306,000)
5,423,646
Net income (loss)
(3,950,642)
(22,516,889)
18,566,247
Net income (loss) attributable to non-controlling interest
2,179
—
2,179
Net income (loss) attributable to Vertex Energy, Inc.
$
(3,952,821)
$
(22,516,889)
$
18,564,068
(17)%
(5)%
7 %
7 %
28 %
100 %
100 %
234 %
68,974 %
(99)%
(200)%
14 %
294 %
76 %
102 %
82 %
100 %
82 %
63
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Each of our segment’s gross profit during these periods was as follows:
Black Oil
Total revenue
Total cost of revenue
Gross profit
Refining And Marketing
Total revenue
Total cost of revenue
Gross profit
Recovery
Total revenue
Total cost of revenue
Gross profit
Year Ended December 31,
2016
2015
$ Change
% Change
$
$
$
$
$
$
76,634,940 $
63,700,341
103,890,188 $
100,425,891
(27,255,248)
(36,725,550)
12,934,599 $
3,464,297 $
9,470,302
13,154,777 $
10,772,867
31,154,066 $
27,814,225
(17,999,289)
(17,041,358)
2,381,910 $
3,339,841 $
(957,931)
8,289,197 $
11,898,207 $
(3,609,010)
7,286,606
8,006,157
(719,551)
1,002,591 $
3,892,050 $
(2,889,459)
(26)%
(37)%
273 %
(58)%
(61)%
(29)%
(30)%
(9)%
(74)%
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 decreased 33% for the year ended December 31, 2016, compared to the year ended December 31, 2015, due primarily to decreased
volumes (as described below) in addition to sharp declines in finished product prices during the first half of the year. Additionally, the average posting (U.S.
Gulfcoast Residual Fuel No. 6 3%) for 2016 decreased $8.51 per barrel from a 2015 average of $40.74 per barrel to an average of $32.23 per barrel during 2016.
On average, prices we received for our products decreased 21% for the year ended December 31, 2016, compared to the year ended December 31, 2015.
Volume for our Black Oil division decreased 16% during fiscal 2016 compared to 2015. This volume decrease is attributable to the decreased amount of
product which was processed through our facilities in Columbus, Ohio and our TCEP facility during the period ended December 31, 2016 compared to the same
period in 2015. Our per barrel margin in the Black Oil division increased approximately 345% for the year ended December 31, 2016 from the same period in
2015. The increase in margins was due to the changes made in our street collections and third party purchasing in connection with our focus on lowering the
prices paid to generators and suppliers for used motor oil during 2016. Additionally, our street collections operations changed to a charge for services model
where we implemented service fees for the handling of used motor oil, the managing of used oil filters, and various other services performed by our collection
division during the second half of 2016. 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
realize and benefit from economies of scale.
Our Black Oil business, which includes our TCEP facility, the Marrero facility and the Heartland facility, generated revenues of $76,634,940 for the year
ended December 31, 2016, with cost of revenues of $63,700,341, producing a gross profit of $12,934,599. During the year ended December 31, 2015, these
revenues were $103,890,188 with cost of revenues of $100,425,891, producing a gross profit of $3,464,297. Gross profit increased for the year ended December
31, 2016, compared to 2015, as a result of increased finished product values through our various facilities and the implementation of charges for services as
previously discussed.
Total volume company-wide decreased 22% during fiscal 2016 compared to 2015, and our per barrel margin increased approximately 26% for fiscal
2016, compared to 2015. This increase was a result of lower prices we paid for feedstock and charging for services through our street collections division,
increased costs to run the business, fixed costs remaining the same and the recent expansions into Columbus, Ohio and Marrero, Louisiana as well as the overall
impact from the falling commodity markets during 2015.
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Our Refining and Marketing division experienced a decrease in production of 39% for its fuel oil cutterstock product for the year ended December 31,
2016, compared to the same period in 2015, and our fuel oil cutterstock commodity prices decreased approximately 20% over the same period. The average
posting (U.S. Gulfcoast No. 2 Waterborne) during 2016 decreased $12.76 per barrel from $63.77 per barrel for 2016 to $51.01 per barrel for 2015.
Our pygas production decreased 31% for the year ended December 31, 2016, compared to the same period in 2015 and commodity prices decreased
approximately 14% for our pygas finished product for 2016, compared to the same period in 2015.
Our gasoline blendstock volumes decreased 79% for the year ended December 31, 2016 as compared to 2015. The average posting (U.S. Gulfcoast
Unleaded 87 Waterborne) during 2016 decreased $.22 per gallon from $1.57 per gallon for 2015 to $1.35 per gallon during 2015. The overall decrease in
revenues associated with our Refining and Marketing division was due to decreases in volumes as well as commodity prices for the year ended December 31,
2016.
Overall volume for the Refining and Marketing division decreased 47% during the year ended December 31, 2016, compared to the year ended
December 31, 2015. Margins per barrel increased in the Refining and Marketing division as a result of market conditions as well as decreased volumes.
During the year ended December 31, 2016, the processing costs for our Refining and Marketing business located at KMTEX were $1,992,433. Revenues
for the same period were $13,154,777 while loss from operations was $402,317. During the year ended December 31, 2015, the processing costs for our
Refining and Marketing business located at KMTEX were $3,845,209. Revenues for the same period were $31,154,066 while income from operations was
$363,708.
Our TCEP technology was not operated during the year ended December 31, 2016 producing finished product due to market conditions. Our TCEP
technology was not operated during the 2015 fourth quarter (for the purpose of producing finished cutterstock),yet it generated revenues of $14,611,336 during
the year ended December 31, 2015, with cost of revenues of $14,051,582, producing a gross profit of $559,754. The TCEP process is currently being utilized as
a pre-treatment for the Used Motor Oil being purchased in the Texas market and then being sent to our Marrero, Louisiana facility. We currently do not have an
estimate as to when or if we may utilize this technology for the production of finished cutterstock in the future.
Our Recovery division includes the business operations of Vertex Recovery as well as that of E-Source. Revenues for this division decreased during 2016
as compared to the same period in 2015. This division periodically participates in project work that is not ongoing, thus we expect to see fluctuations in revenue
and gross profit from period to period. These projects are typically bid related and can take time to line out and get going; however we believe these are very
good projects for the Company and we anticipate more in the upcoming periods.
Prevailing prices of certain commodity products can significantly impact our revenues and cash flows. As noted above the revenue variances from fiscal
2015 to 2016 were largely impacted due to the changes in commodity pricing between the two periods as detailed below.
The following table sets forth the high and low spot prices during 2016 for our key benchmarks.
2016
Benchmark
High
Date
Low
Date
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)
$
1.55
1.73
47.50
54.06
December 30 $
0.78
December 29 $
December 30 $
December 28 $
0.89
16.24
26.21
January 20
February 9
January 19
February 9
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The following table sets forth the high and low spot prices during 2015 for our key benchmarks.
2015
Benchmark
High
Date
Low
Date
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)
$
1.96
2.06
54.73
60.93
April 30 $
0.89
December 14
June 10 $
May 6 $
May 6 $
1.10
20.04
34.73
December 22
December 30
December 18
We saw on average a fairly unstable market in each of the benchmark commodities we track during 2016 and 2015. During the first half of 2016, the
commodity markets experienced a steady decline due to overall global economic conditions mostly related to supply and demand for the products we track, and
their improvement throughout the second half of 2016.
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 53% from $10,696,188 for the year ended December 31, 2015 to $16,319,100 for the year ended December 31, 2016, primarily
due to changes made to our business specifically around our street collections of used motor oil where we are now charging for our services of collecting used
motor oil and filters versus paying in prior years, and the slight improvement in commodity prices during the second half of 2016.
We had selling, general and administrative expenses (exclusive of acquisition related expenses and depreciation and amortization) of $19,966,426 for the
year ended December 31, 2016, compared to $24,046,464 from the prior year’s period, a decrease of $4,080,038 or 17% from the prior period, due to a decrease
in the associated costs of maintaining the Bango facility until the sale in 2016.
We had total other income of $6,044,226 for the year ended December 31, 2016, compared to total other expense of $3,117,848 for the year ended
December 31, 2015. The main reasons for the increase in other income was a $9,617,768 increase in gain on sale of assets to $9,631,712 for the year ended
December 31, 2016, compared to $13,944 for the year ended December 31, 2015 (as described in greater detail below), $4,922,353 of goodwill impairment in
connection with the full impairment of the goodwill related to our Black Oil and Recovery divisions and a $485,770 decrease in interest expense associated with
the credit agreements, described below under “Liquidity and Capital Resources ” during 2015, compared to 2016. We had $49,876 and $5,479,463 of gain on
change in value of derivative liability for the year ended December 31, 2016 and 2015, respectively, in connection with a beneficial conversion feature on certain
warrants granted in June 2015 and May 2016, as described in greater detail in "Note 15. Preferred Stock and Temporary Equity " to the consolidated financial
statements included herein under "Part II"-"Item 8- Financial Statements and Supplementary Data" .
We had a loss on futures contracts of $548,380 for the year ended December 31, 2016 compared to a gain on futures contracts of $551,090 for the year
ended December 31, 2015. We use futures contracts to offset the effects of the market value changes in our hedged items, as well as to avoid significant volatility
that might arise due to market exposure.
We had gain on the sale of assets of $9,631,712 for the year ended December 31, 2016, mainly related to the purchase and sale of the Bango facility in
January 2016.
We had a loss before income taxes of $4,068,288 for the year ended December 31, 2016 compared to a loss before income taxes of $17,210,889 for the
year ended December 31, 2015, a 76% decrease. The decrease in net loss before taxes was largely
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
due to changes made to our business as discussed above and the slight improvement during the second half of 2016 in commodity prices, the decreased
operating expenses related, in addition to the decreased selling, general and administrative expenses. We had no reduction in contingent liability during the 12
months ended December 31, 2016. We had a reduction in contingent liability during the 12 months ended December 31, 2015 of $6,069,000 which positively
affected income from operations during 2015.
We had an income tax benefit of $117,646 during the 12 month period ended December 31, 2016, compared to an income tax expense of $5,306,000
during the 12 month period ended December 31, 2015.
We had a net loss of $3,952,821 for the year ended December 31, 2016 compared to a net loss of $22,516,889 for the year ended December 31, 2015, a
decrease in net loss of $18,564,068 or 82% from the prior period for the reasons described above.
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.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Set forth below, we have disclosed a quarter-by-quarter summary of our statements of operations and statements of operations by segment information
for the quarters ended December 31, September 30, June 30, and March 31, 2016 and 2015, respectively.
Statements of Operations by Quarter
Fiscal 2016
Fiscal 2015
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
Fourth
Quarter
Third
Quarter
Second
Quarter
$
31,055,936
$
28,461,930
$
25,758,117
22,462,171
5,297,819
5,999,759
—
—
24,428,444 $
19,168,398
5,260,046
—
14,132,604 $
14,371,128
(238,524)
—
20,875,827 $
20,497,691
378,136
(6,069,000)
39,262,584 $
34,104,949
5,157,635
—
49,119,711 $
43,635,177
5,484,534
—
4,804,400
1,569,414
4,978,004
1,560,562
64,857
47,217
4,688,035
1,553,655
26,523
5,495,987
1,593,584
49,376
6,982,422
1,920,416
11,584
6,052,764
1,597,881
5,910
5,641,250
1,561,314
—
First
Quarter
37,684,339
38,008,456
(324,117)
—
5,370,028
1,556,982
157,678
6,438,671
6,585,783
6,268,213
7,138,947
2,845,422
7,656,555
7,202,564
7,084,688
Revenues
Cost of revenues
Gross profit
Reduction of contingent liability
Selling, general and administrative
expenses
Depreciation and amortization
Acquisition related expenses
Total selling, general and administrative
expenses
Income (loss) from operations
(1,140,852)
(586,024)
(1,008,167)
(7,377,471)
(2,467,286)
(2,498,920)
(1,718,030)
(7,408,805)
Other income (expense)
Provision for doubtful accounts
Goodwill Impairment
Interest income
Gain(loss) Asset Sales
Gain on change in value of derivative
liability
Gain on futures contracts
Interest expense
Total other income (expense)
—
—
1,522
(1,323)
(674,309)
(196,560)
(373,900)
(1,244,570)
—
—
1,490
(68,799)
1,065,217
(90,061)
(399,545)
508,302
—
—
2,486
—
1,645,288
(317,675)
(406,019)
924,080
—
—
476
9,701,834
(1,986,320)
55,916
(1,915,492)
5,856,414
1,995,180
(4,922,353)
(4,475)
92,261
2,844,430
155,660
(728,780)
(568,077)
—
—
11
(20,657)
818,051
395,430
(763,791)
429,044
—
—
10
12,818
1,816,982
—
(556,975)
1,272,835
(2,650,000)
—
8
(70,478)
—
—
(1,531,180)
(4,251,650)
Income (loss) before income taxes
(2,385,422)
(77,722)
Income tax benefit (expense)
—
—
Net income (loss)
(2,385,422)
(77,722)
(84,087)
—
(84,087)
(1,521,057)
117,646
(1,403,411)
(3,035,363)
—
(3,035,363)
(2,069,876)
—
(2,069,876)
(445,195)
—
(445,195)
(11,660,455)
(5,306,000)
(16,966,455)
Net income (loss)attributable to non-
controlling interest
Net income (loss)attributable to Vertex
Energy, Inc.
Number of weighted average common
shares outstanding
Basic
Diluted
13,372
30,234
(41,427)
—
—
—
—
—
(2,398,794)
(107,956)
(42,660)
(1,403,411)
(3,035,363)
(2,069,876)
(445,195)
(16,966,455)
32,414,943
30,576,485
32,414,943
30,576,485
29,765,702
29,765,702
29,304,722
29,304,722
28,198,701
28,198,701
28,198,701
28,198,701
28,130,575
28,130,575
28,118,396
28,118,396
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Statements of Operations by Quarters
Fiscal 2016
Fiscal 2015
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
$
$
$
$
$
$
23,757,821
$
22,907,235
$
19,123,192
17,817,032
4,634,629
$
5,090,203
$
19,836,390 $
15,557,879
4,278,511 $
10,133,494 $
11,202,238
(1,068,744) $
17,004,934 $
17,244,210
(239,276) $
27,632,744 $
25,128,353
2,504,391 $
34,338,534 $
30,912,204
3,426,330 $
24,913,976
27,141,124
(2,227,148)
3,168,730
$
4,436,111
$
2,893,913
3,610,051
2,923,481 $
2,169,238
2,626,455 $
2,099,665
2,687,922 $
2,270,299
8,752,135 $
8,281,753
274,817
$
826,060
$
754,243 $
526,790 $
417,623 $
470,382 $
11,447,889 $
9,956,771
1,491,118 $
8,266,120
7,305,402
960,718
4,129,385
$
1,118,584
$
1,668,573 $
1,372,655 $
1,182,971 $
2,877,705 $
3,333,288 $
4,504,243
3,741,012
1,035,088
1,441,281
1,069,225
388,373
$
83,496 $
227,292 $
303,430 $
983,182
199,789 $
694,843
2,182,862 $
2,766,202
3,561,930
567,086 $
942,313
Black Oil
Revenues
Cost of revenues
Gross profit
Refining & Marketing
Revenues
Cost of revenues
Gross profit
Recovery
Revenues
Cost of revenues
Gross profit
The below graph charts our total quarterly revenue over time from March 31, 2015 to December 31, 2016:
Liquidity and Capital Resources
The success of our current business operations has become more dependent on repairs, and maintenance to our facilities and our ability to make routine
capital expenditures. We also must maintain relationships with feedstock suppliers and end product customers, and operate with efficient management of
overhead costs. Through these relationships, we have historically been able to achieve volume discounts in the procurement of our feedstock, thereby increasing
the margins of our divisions' operations. The resulting operating cash flow is crucial to the viability and growth of our existing business lines.
We had total assets of $86,985,968 as of December 31, 2016 compared to $93,644,816 at December 31, 2015. This decrease was partly due to the
$4,714,326 decrease in net fixed and intangible assets as of December 31, 2016, and no assets held for sale during 2016 as compared to $11,170,243 in 2015.
Total current assets as of December 31, 2016 of $21,185,452 include cash and cash equivalents of $1,701,435, escrow- restricted cash and cash equivalents of
$1,504,723 accounts receivable, net, of $ 10,952,219, inventory of $4,357,958 and prepaid expenses of $ 2,669,117. Long term assets consisted of fixed assets,
net, of $50,029,934, a net intangible asset in the amount of $ 15,252,332 which primarily represents the value of
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
the Company’s patents, and other assets of $ 518,250. Net fixed assets decreased $2,998,673 as a result of accumulated depreciation in the normal course of
business.
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 $ 22,453,644 as of December 31, 2016, compared to $33,665,411 at December 31, 2015. This decrease was largely due
to the decrease in our accounts payable and current portion of long-term debt during the year ended December 31, 2016. Accounts payable totaled $9,440,696
as of December 31, 2016, compared to $13,244,388 as of December 31, 2015. The current portion of long-term debt including the revolving note, totaled
$12,375,321 as of December 31, 2016, compared to $19,533,613 as of December 31, 2015. The total portion of long-term debt totaled $ 1,848,111 compared to
$5,539,659, as of December 31, 2016, compared to 2015. We had $133,153 of current portion of capital lease liabilities as of December 31, 2016 compared to
$186,948 as of December 31, 2015. The payments of our debt are the main reason of the overall reduction.
We had total liabilities of $ 28,667,747 as of December 31, 2016, including current liabilities of $ 22,453,644 and long-term liabilities of $ 6,214,103, which
included $1,848,111 of long-term debt representing notes payable to Texas Citizens bank, and $ 4,365,992 of derivative liability related to the Series B and B1
Preferred Stock dividend to be issued. The Series B1 Preferred Stock was created during the year which attributed to the increase in our derivative liability.
We had negative working capital of $ 1,268,192 as of December 31, 2016, compared to negative working capital of $ 10,498,637 as of December 31, 2015.
The decrease in working capital deficit is mainly due to the decrease in current portion of long-term debt and accounts payable and accrued expenses offset by
increases in cash and cash equivalents, accounts receivable, and inventory (as described above and in the notes to the financial statements).
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 refining facilities. During the first quarter of 2016 our
Heartland facility experienced a fire at the re-refinery, this affected our cash flows during the first quarter as well as into the second quarter as this facility worked
to come back on-line. The Heartland facility became fully operational in May 2016.
In February 2013, Bank of America, N.A. (“BOA”) agreed to lease the Company up to $1,025,000 of equipment to enhance the TCEP operation. Monthly
payments are fixed for the sixty month duration of the lease at $13,328 per month. The lease also provides an early buy-out right for the Company and a right for
the Company to extend the lease at the end of its term.
As a result of the E-Source acquisition the Company has notes payable to various financial institutions, bearing interest at rates ranging from 6% to
6.35%, maturing from November, 2015 to April, 2023. The balance of the notes payable is $1,531,506 at December 31, 2016.
The Company financed insurance premiums through various financial institutions bearing interest rates from 4% to 4.52%. All such premium finance
agreements have maturities of less than one year and have a balance of $1,060,065 at December 31, 2016.
On May 2, 2014, in connection with the closing of the Omega acquisition, the Company assumed two capital leases totaling $3,154,860. Payments made
since 2014 have reduced the balance to $133,153 at December 31, 2016.
Credit and Guaranty Agreement and Revolving Credit Facility with Encina Business Credit, LLC
Effective February 1, 2017, we, Vertex Operating, and substantially all of our other operating subsidiaries, other than E-Source, entered into a Credit
Agreement (the “EBC Credit Agreemen t”) with Encina Business Credit, LLC as agent (the “ Agent” or “EBC”) and Encina Business Credit SPV, LLC and CrowdOut
Capital LLC as lenders thereunder (the “EBC Lenders”). Pursuant to the EBC Credit Agreement, and the terms thereof, the EBC Lenders agreed to loan us up to
$20 million, provided that the amount outstanding under the EBC Credit Agreement at any time cannot exceed 50% of the value of the operating plant facilities
and related machinery and equipment owned by us (not including E-Source), based on the most recent appraisal of such facilities.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
A total of $12 million was loaned to us by the EBC Lenders on February 1, 2017 pursuant to the terms of the EBC Credit Agreement, and a total of an
additional $8 million in funding may be requested by us from the EBC Lenders, from time to time, subject to the terms of the EBC Credit Agreement, and the
conditions for lending set forth therein, subject to a minimum of $500,000, or a multiple of $100,000 above such amount, being requested at any time.
Amounts borrowed under the EBC Credit Agreement bear interest at 12%, 13% or 14% per annum, based on the ratio of (a) (i) consolidated EBITDA for
such applicable period minus (ii) capital expenditures made during such period, minus (iii) the aggregate amount of income taxes paid in cash during such period
(but not less than zero) to (b) the sum of (i) debt service charges plus (ii) the aggregate amount of all dividend or other distributions paid on capital stock in cash
for the most recently completed 12 month period (which ratio falls into one of the three following tiers: less than 1 to 1; from 1 to 1 to less than 1.45 to 1; or equal
to or greater than 1.45 to 1, which together with the value below, determines which interest rate is applicable) and average availability under the Revolving Credit
Agreement (defined below) (which falls into two tiers: less than $2.5 million and greater than or equal to $2.5 million, which together with the calculation above,
determines which interest rate is applicable), as described in greater detail in the EBC Credit Agreement (increasing by 2% per annum upon the occurrence of an
event of default). Interest on amounts borrowed under the EBC Credit Agreement is payable by us in arrears, on the first business day of each month, beginning
on the first business day of the first full month following the closing, together with required $75,000 monthly principal repayments. We also have the right to make
voluntary repayments of the amount owed under the EBC Credit Agreement in amounts equal to or greater than $100,000, from time to time.
The EBC Credit Agreement terminates on February 1, 2020, on which date we are required to repay the outstanding balance owed thereunder and any
accrued and unpaid interest thereon.
We agreed to pay the agent certain fees in connection with the EBC Credit Agreement, including a fee equal to 0.5% of a portion of the undrawn portion
of the EBC Credit Agreement per annum (equal to $30,000 at closing) and a termination fee, in the event the EBC Credit Agreement terminates prior to the
maturity date thereof (or we reduce the amount available for loans thereunder), equal to 2% of the amount repaid (or the reduction in the amount available under
the EBC Credit Agreement). Notwithstanding the above, during the period beginning six months prior to the maturity date and ending on the maturity date, no
early termination fee is due if we provide prior written notice to the agent at least ninety (90) days prior
to the applicable termination date.
The amounts borrowed under the EBC Credit Agreement are guaranteed by us and our subsidiaries, other than E-Source, pursuant to a Guaranty and
Security Agreement (the “Guaranty and Security Agreement ”), whereby we also pledged substantially all of our assets and all of the securities of our subsidiaries
(other than E-Source) as collateral securing the amount due under the terms of the EBC Credit Agreement. We also provided EBC mortgages on our Marrero,
Louisiana, and Columbus, Ohio facilities to secure the repayment of outstanding amounts and agreed to provide mortgages on certain other real property to be
delivered post-closing.
We agreed to use the proceeds raised under the EBC Credit Agreement for working capital, capital expenditures, general corporate purposes and to
refinance the Existing Credit Obligations (as defined below), and subject to the terms of the EBC Credit Agreement, to finance permitted acquisitions.
The EBC Credit Agreement contains customary representations, warranties and requirements for the Company to indemnify the EBC Lenders and their
affiliates. The EBC Credit Agreement also includes various covenants (positive and negative) binding upon the Company, including, prohibiting us from
undertaking acquisitions or dispositions unless they meet the criteria set forth in the EBC Credit Agreement, not incurring any capital expenditures in amount
exceeding $3 million in any fiscal year that the EBC Credit Agreement is in place, and requiring us to maintain at least $2.5 million of average borrowing
availability under the Revolving Credit Agreement (defined below) in any 30 day period.
We are required to repay the amounts borrowed under the EBC Credit Agreement in the event we complete any disposition of assets or securities,
receive any funds in connection with any insurance proceeds, and/or upon the occurrence of certain other events, subject to certain exceptions described in the
EBC Credit Agreement. Additionally, commencing with the first full fiscal month after which the initial principal amount of the loans advanced under the EBC
Credit Agreement is equal to or greater than $17 million and for each fiscal quarter thereafter, we are required to prepay the amount due under the EBC Credit
Agreement in an amount equal to 50% of our cash flow, less principal payments (including voluntary repayments) made under the EBC Credit Agreement,
approved capital expenditures and certain other approved expenses.
The EBC Credit Agreement includes customary events of default for facilities of a similar nature and size as the EBC Credit Agreement, including if an
event of default occurs under any agreement evidencing $500,000 or more of indebtedness of the Company; we fail to make any payment when due under any
material agreement; subject to certain exceptions, any
71
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
judgment is entered against the Company in an amount exceeding $500,000; and also provides that an event of default occurs if a change in control of the
Company occurs, which includes if (a) Benjamin P. Cowart, the Company’s Chief Executive Officer, Chairman of the Board and largest shareholder and Chris
Carlson, the Chief Financial Officer of the Company, cease to own and control legally and beneficially, collectively, either directly or indirectly, equity securities in
Vertex Energy, Inc., representing more than 15% of the combined voting power of all securities entitled to vote for members of the board of directors or equivalent
on a fully-diluted basis, (b) the acquisition of ownership, directly or indirectly, beneficially or of record, by any person or group of securities representing more than
30% of the aggregate ordinary voting power represented by the issued and outstanding securities of Vertex Energy, Inc., or (c) during any period of 12
consecutive months, a majority of the members of the board of directors of the Company cease to be composed of individuals (i) who were members of that board
or equivalent governing body on the first day of such period, (ii) whose election or nomination to that board or equivalent governing body was approved by
individuals referred to in clause (i) above constituting at the time of such election or nomination at least a majority of that board or equivalent governing body or
(iii) whose election or nomination to that board or other equivalent governing body was approved by individuals referred to in clauses (i) and (ii) above constituting
at the time of such election or nomination at least a majority of that board or equivalent governing body (collectively “Events of Default ”). An event of default under
the Revolving Credit Agreement (defined below), is also an event of default under the
EBC Credit Agreement.
Effective February 1, 2017, we, Vertex Operating and substantially all of our operating subsidiaries, other than E-Source, entered into a Revolving Credit
Agreement (the “Revolving Credit Agreement ”) with Encina Business Credit SPV, LLC as lender (“ Encina”) and EBC as the administrative agent. Pursuant to the
Revolving Credit Agreement, and the terms thereof, Encina agreed to loan us, on a revolving basis, up to $10 million, subject to the terms of the Revolving Credit
Agreement and certain lending ratios set forth therein, which provide that the amount outstanding thereunder cannot exceed an amount equal to the total of (a)
the lesser of (A) the value (as calculated in the Revolving Credit Agreement) of our inventory which are raw materials or finished goods that are merchantable and
readily saleable to the public in the ordinary course of our business (“EBC Eligible Inventory”), net of certain inventory reserves, multiplied by 85% of the
appraised value of EBC Eligible Inventory, or (B) the value (as calculated in the Revolving Credit Agreement) of EBC Eligible Inventory, net of certain inventory
reserves, multiplied by 65%, subject to a ceiling of $4 million, plus (b) the face amount of certain accounts receivables (net of certain reserves applicable thereto)
multiplied by 85% (subject to adjustment as provided in the Revolving Credit Agreement); minus (c) the then-current amount of certain reserves that the agent
may determine necessary for the Company to maintain.
Amounts borrowed under the Revolving Credit Agreement bear interest, subject to the terms of the Revolving Credit Agreement, at the one month LIBOR
interest rate then in effect, subject to a floor of 0.25% (which interest rate is currently approximately 0.78% per annum), plus an additional 6.50% per annum
(increasing by 2% per annum upon the occurrence of an event of default), provided that under certain circumstances amounts borrowed bear interest at the
higher of (a) the “prime rate”; (b) the Federal Funds Rate, plus 0.50%; and (c) the LIBOR Rate for a one month interest period, plus 1.00%). Interest on amounts
borrowed under the Revolving Credit Agreement is payable by us in arrears, on the first business day of each, beginning on the first business day of the first full
month following the closing.
The Revolving Credit Agreement terminates on February 1, 2020, on which date we are required to repay the outstanding balance owed thereunder and
any accrued and unpaid interest thereon.
We agreed to pay the agent certain fees in connection with the Revolving Credit Agreement, including a commitment fee equal to 0.5% per annum,
multiplied by the actual daily amount by which the amount outstanding under the Revolving Credit Agreement is less than the $10 million aggregate commitment
thereunder during the immediately preceding quarter, payable monthly in arrears and a termination fee, in the event the Revolving Credit Agreement terminates
prior to the maturity date thereof (or we reduce the amount available for loans thereunder), equal to 2% of the aggregate commitment amount (or the reduction in
such amount) if terminated prior to the one year anniversary of our entry into the Revolving Credit Agreement, 1% of the aggregate commitment amount (or
reduction in such amount) if terminated between the one year anniversary and two year anniversary of our entry into the Revolving Credit Agreement and 0.5% of
the aggregate commitment amount (or reduction in such amount) if terminated after the two year anniversary of our entry into the Revolving Credit Agreement.
Notwithstanding the above, during the period beginning six months prior to the maturity date and ending on the maturity date, no early termination fee is due if we
provide prior written notice to the agent at least ninety (90) days prior to the applicable termination date.
We can request funds from time to time under the terms of the Revolving Credit Agreement, subject to us requesting a minimum of $500,000 ($100,000
upon certain events), or a multiple of $100,000 above such amount.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The amounts borrowed under the Revolving Credit Agreement are guaranteed by us and our subsidiaries other than E-Source pursuant to a separate
Guaranty and Security Agreement, similar to the EBC Credit Agreement, described in greater detail above. We also provided Encina mortgages on our Marrero,
Louisiana, and Columbus, Ohio facilities to secure the repayment of outstanding amounts.
We agreed to use the proceeds raised under the Revolving Credit Agreement for working capital, capital expenditures, general corporate purposes and to
refinance the Existing Credit Obligations (as defined below).
The Revolving Credit Agreement contains customary representations, warranties and requirements for the Company to indemnify Encina and its affiliates.
The Revolving Credit Agreement also includes various covenants (positive and negative) binding upon the Company, including, prohibiting us from undertaking
acquisitions or dispositions unless they meet the criteria set forth in the Revolving Credit Agreement, not incurring any capital expenditures in amount exceeding
$3 million in any fiscal year that the Revolving Credit Agreement is in place, and requiring us to maintain at least $2.5 million of average borrowing availability
under the Revolving Credit Agreement in any 30 day period.
We are required to repay the amounts borrowed under the Revolving Credit Agreement in the event we complete any disposition of assets or securities,
receive any funds in connection with any insurance proceeds, and/or in certain other events, subject to certain exceptions described in the Revolving Credit
Agreement.
The Revolving Credit Agreement includes customary events of default for facilities of a similar nature and size as the Revolving Credit Agreement,
including the same Events of Default as are described above under the description of the EBC Credit Agreement.
A total of $11,282,537 of the amount borrowed under the EBC Credit Agreement and Revolving Credit Agreement was used to repay amounts owed
under (a) the Restated Goldman Credit Agreement (defined and described in greater detail below under “Credit and Guaranty Agreement with Goldman Sachs
Bank USA”), (b) the MidCap Loan Agreement (defined below under “ MidCap Loan Agreement”); and (c) the Fox Note (defined below under “ Fox Note”)
(collectively, “Existing Credit Obligations ”), all of which have been repaid in full as of the date of this filing. Additionally, in connection with the repayment of such
obligations, the Restated Goldman Credit Agreement and Midcap Loan Agreement, and our right to borrow funds thereunder were terminated.
Credit and Guaranty Agreement with Goldman Sachs Bank USA
On May 2, 2014, the Company entered into a Credit and Guaranty Agreement (as amended from time to time, the “ Goldman Credit Agreement ”) with
Goldman Sachs Bank USA. Pursuant to the agreement, Goldman Sachs Bank USA loaned the Company $40,000,000 in the form of a term loan. As set forth in
the Goldman Credit Agreement, the Company has the option to select whether loans made under the Goldman Credit Agreement bear interest at (a) the greater
of (i) the prime rate in effect, (ii) the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System plus ½
of 1%, (iii) the sum of (A) the Adjusted LIBOR Rate and (B) 1%, and (iv) 4.5% per annum; or (b) the greater of (i) 1.50% and (ii) the applicable ICE Benchmark
Administration Limited interest rate, divided by (x) one minus, (y) the Adjusted LIBOR Rate. Interest on the Goldman Credit Agreement is payable monthly in
arrears. Amortizing principal payments are due on the Goldman Credit Agreement in the amount of $800,000 per fiscal quarter thereafter until maturity on May 2,
2019.
The Goldman Sachs Bank USA financing arrangement is secured by all of the assets of the Company, but was subordinate to the Bank of America credit
agreement described below.
On December 5, 2014 and March 26, 2015, we, Vertex Operating, and substantially all of our other subsidiaries (other than E-Source), Goldman Sachs
Specialty Lending Holdings, Inc. (“Lender”) and Goldman Sachs Bank USA, as Administrative Agent and Collateral Agent for Lender (“ Agent”), entered into a First
Amendment and Second Amendment, respectively, to the Goldman Credit Agreement (the “Second Amendment”). We were continuing under the Goldman Credit
Agreement and the parties entered into the Second Amendment to among other things, provide for the waiver of the prior defaults and to restructure certain
covenants and other financial requirements of the Goldman Credit Agreement and to allow for our entry into the MidCap Loan Agreement (described below).
The amendments to the Goldman Credit Agreement effected by the Second Amendment include, but are not limited to:
•
Effecting various amendments to the Goldman Credit Agreement to substitute the name of MidCap Business Credit, LLC and the MidCap Loan
Agreement (as described below) in place of Bank of America, NA ("BOA"), and the Company's prior Goldman Credit Agreement with BOA.
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•
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•
Increasing the interest rate of certain outstanding loans made under the terms of the Goldman Credit Agreement by up to 2% per annum, based on the
leverage ratio of debt to consolidated EBITDA of the Company.
Changing the calculation dates for certain fixed charge ratios required to be calculated pursuant to the terms of the Goldman Credit Agreement.
Changing how certain debt leverage ratios are calculated under the terms of the Goldman Credit Agreement.
Increasing the additional default interest payable upon the occurrence of an event of default under the Goldman Credit Agreement to 4% per annum
(compared to 2% per annum for all other defaults) above the then applicable interest rate in the event we failed to make the Required Prepayment (as
defined below).
Providing that no quarterly amortization payments would be due under the terms of the Goldman Credit Agreement for the quarters ended March 31,
2015 and June 30, 2015 (previously amortization payments of $800,000 per quarter were due for both such quarters).
Providing that we were not required to meet certain debt and leverage covenants for certain periods of fiscal 2015.
Requiring that we raise at least $9.1 million by June 30, 2015 through the sale of equity, and that we were required to pay such funds directly to the
Lender as a mandatory pre-payment of the amounts outstanding under the Goldman Credit Agreement (the “Required Payment”), which required
payment was paid in June 2015, as described below.
Changing certain of the required prepayment terms of the Goldman Credit Agreement, which require us to prepay the amounts owed under the Goldman
Credit Agreement in an amount equal to 100% of the extent total consolidated debt exceeds (x) total consolidated EBITDA (as calculated pursuant to the
agreement) multiplied by (y) the maximum debt leverage ratios described in the Goldman Credit Agreement, provided that no prepayments in connection
with such requirements are required to be made through December 31, 2015.
Reducing the amount of allowable additional borrowings we can make under other debt agreements and facilities to $7 million in aggregate (including not
more than $6 million under the MidCap Loan Agreement through December 31, 2015).
Changing certain fixed charge, leverage ratios and consolidated EBITDA calculations, definitions, and requirements relating to covenants under the
Goldman Credit Agreement.
Changing the required amount of cash on hand and available borrowings under the MidCap Loan Agreement. We were required to have at least (a)
$750,000 after the date of the Second Amendment and prior to June 30, 2015, (b) $1.5 million at any time after June 30, 2015 and prior to December 31,
2015, (c) $2 million at any time after December 31, 2015 and prior to June 30, 2016, (d) $2.5 million at any time after June 30, 2016 and prior to
December 31, 2016, and (e) $3 million at any time after December 31, 2016.
The Lender also waived all of the prior defaults which the Lender had provided the Company notice of previously (which were all of the known defaults
that existed at the time of the parties’ entry into the Second Amendment) and the Company and its subsidiaries provided a release in favor of the Lender and its
representatives and assigns. We also agreed to pay the Agent a fee of $50,000 per year (including $50,000 paid upon our entry into the Second Amendment) as
an administration fee; and pay the Agent certain prepayment fees in the event we prepay amounts outstanding under the Goldman Credit Agreement prior to
March 26, 2018, provided no prepayment fee is due in connection with the Required Payment or certain other mandatory prepayments required under the terms
of the Goldman Credit Agreement, subject to certain exceptions.
As additional consideration for the Lender agreeing to the terms of the Second Amendment, we granted Goldman, Sachs & Co., an affiliate of the Lender
(the “Holder”) a warrant to purchase 1,766,874 shares of our common stock which was evidenced by a Common Stock Purchase Warrant (the “ Lender Warrant”).
The Lender Warrant was to expire on March 26, 2022 and originally had an exercise price equal to the lower of (x) $3.39583 per share; and (y) the lowest price
per share at which we issue any common stock (or sets an exercise price for the purchase of common stock) between the date of our entry into the Lender
Warrant and June 30, 2015. The Lender Warrant was exercisable by the Holder at any time after September 1, 2015, including pursuant to a cashless exercise.
The Lender Warrant provided that in the event that, prior to June 30, 2015, we prepaid the amount owed under the Goldman Credit Agreement in an amount
greater than $9.1 million (i.e., in an amount greater than the Required Payment) then the number of shares of common stock issuable upon exercise of the
Lender Warrant is reduced by the pro rata amount by which
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the amount prepaid exceeds $9.1 million and is less than $15.1 million, provided that if prior to June 30, 2015 we prepaid at least $6 million in addition to the
Required Payment the Lender Warrant automatically terminated.
On June 18, 2015, the Company entered into the Third Amendment to Credit and Guaranty Agreement (the “ Third Amendment”), which amended the
Goldman Credit Agreement (defined above). The amendments to the Goldman Credit Agreement effected by the Third Amendment include, but are not limited to:
•
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Extending the time period pursuant to which we were required to make certain post-closing deliverables pursuant to the terms of the Goldman Credit
Agreement.
Providing that we were not required to meet certain debt and leverage covenants for certain periods extending until March 31, 2016 (previously we were
required to meet such covenants beginning with the quarter ended December 31, 2015).
Extending the date we were required to begin making required prepayments under the terms of the Goldman Credit Agreement, in an amount equal
to 100% to the extent total consolidated debt exceeds (x) total consolidated EBITDA (as calculated pursuant to the agreement) multiplied by (y) the
maximum debt leverage ratios described in the Goldman Credit Agreement, until March 31, 2016 (previously no payments were required to be made
through December 31, 2015).
Reducing certain required consolidated EBITDA targets pursuant to the terms of the Goldman Credit Agreement to be more favorable to the Company,
including reducing such targets to $250,000, $1.5 million, $4.25 million, $7.25 million and $9.5 million for the quarters ended September 30, 2015,
December 31, 2015, March 31, 2016, June 30, 2016 and September 30, 2016 (and each quarter thereafter), respectively, compared to $3 million, $5.5
million, $8 million, $9 million and $10 million, respectively.
Extending the date we were required to begin meeting various leverage ratios and consolidated EBITDA targets as set forth in the Goldman Credit
Agreement from December 31, 2015 and June 30, 2015, to March 31, 2016 and September 30, 2015, respectively.
As additional consideration for the Lender agreeing to the terms of the Third Amendment, we agreed to modify, pursuant to a First Amendment to
Warrant, the terms of the Lender Warrant. Pursuant to the First Amendment to Warrant, we agreed to reduce the exercise price of the Lender Warrant
to $2.778 per share (the 30 day volume weighted average price of our common stock as of the date of our entry into the Third Amendment)
from $3.395828553 per share, and that in the event we issue any preferred stock, that the lowest exercise price associated with any warrants or similar
convertible securities issued in connection with such preferred stock offering shall become the exercise price of the Lender Warrant; provided that, if the
Company did not issue preferred stock on or prior to June 30, 2015, then the exercise price of the Lender Warrant would be reduced to the lowest closing price
per share of our common stock on any date between March 26, 2015 and June 30, 2015.
Effective June 29, 2015, we repaid $15.1 million of the amount owed to the Lender under the Goldman Credit Agreement, and as a result, the Lender
Warrant and rights thereunder were canceled and terminated.
On November 9, 2015, we, Vertex Operating, and certain of our subsidiaries, Lender, as lender and Agent, as administrative agent, entered into a Fourth
Amendment to Goldman Credit Agreement (the “Fourth Amendment”). The amendments to the Goldman Credit Agreement effected by the Fourth Amendment
include, but are not limited to:
•
•
•
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Including Vertex OH in the calculation of Consolidated Adjusted EBITDA, once Vertex OH has (a) delivered certain required mortgages and legal
opinions in respect to its real estate properties and in order to create a valid first priority security interest in such real estate properties in favor of the
Agent, (b) taken action to cause certain deposit accounts of Vertex OH to become controlled accounts under the Goldman Credit Agreement; and (c)
appointed an agent for service of process in New York.
Excluding from the definition of Consolidated Liquidity any amounts which are more than 75 days past due.
Changing the beginning calculation dates for certain fixed charge ratios required to be calculated pursuant to the terms of the Goldman Credit Agreement
from December 31, 2015 to March 31, 2016.
Changing the way certain required leverage ratios are calculated as provided in the Goldman Credit Agreement.
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•
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Extending the date that we were required to begin making installment payments on the Goldman Credit Agreement from September 30, 2015 to the
earlier of (a) December 31, 2015; and (b) the date we receive insurance proceeds from the Nevada plant of at least $800,000.
Removing prior restrictions which prevented Vertex OH from undertaking certain actions including co-mingling funds with the Company’s other
subsidiaries and which required such entity to maintain its own books and records.
Extending the date we were required to begin meeting various leverage ratios relating to indebtedness, fixed charge ratios and consolidated EBITDA
targets (while also reducing such consolidated EBITDA targets) from December 31, 2015 to March 31, 2016, and in some cases modifying the
calculation of such ratios.
Reducing minimum consolidated liquidity amounts to not less than (i) $500,000 at any time from the date of the Fourth Amendment to December 31,
2015, (ii) $750,000 at any time after December 31, 2015 and on or prior to March 31, 2016, and (iii) $1,000,000 at any time after March 31, 2016.
Additionally, the Agent and the Company agreed that if the Company prepays, for any reason, all or any part of the principal balance of the amount owed
under the Goldman Credit Agreement on or prior to June 18, 2018, the Company would pay the Agent a prepayment premium (“Prepayment Premium”) equal to
(i) the greater of (a) 4.00% of such prepayment and (b) the Yield Maintenance Premium (defined below) with respect to such prepayment, if such repayment
occurs on or prior to June 18, 2017, (ii) 2.00% of such repayment if such repayment occurs after June 18, 2017 and on or prior to June 18, 2018, and (iii) nothing
thereafter; provided, however, that no Prepayment Premium is due with respect to any mandatory prepayment from (1) insurance proceeds received pursuant to
the terms of the Goldman Credit Agreement, (2) excess cash flow under the terms of the Goldman Credit Agreement, (3) amounts required to be paid under the
Goldman Credit Agreement in the event, among other things, certain EBITDA targets and leverage ratios are not met, (4) certain other mandatory prepayments of
the amounts owed under the Goldman Credit Agreement; (5) tax return payments under the Goldman Credit Agreement, or voluntary prepayments of the amounts
owed under the Goldman Credit Agreement prior to January 31, 2016. “Yield Maintenance Premium” means an amount equal to (1) the aggregate amount of
interest which would have otherwise been payable on the amount of the principal prepayment from the date of prepayment until June 18, 2017, minus (2) the
aggregate amount of interest the holder of the debt would earn if the prepaid principal amount were reinvested for the period from the date of prepayment until
June 18, 2017 in treasury securities. Finally, the Agent agreed to Vertex OH becoming a party to the Midcap Loan Agreement (described below) and to
guaranteeing certain debt owed to Midcap thereunder.
On January 29, 2016, we, Vertex Operating, certain of our other subsidiaries, Lender and Agent entered into an Amended and Restated Credit and
Guaranty Agreement (the “Restated Goldman Credit Agreement ”), which amended and restated the Goldman Credit Agreement. The Restated Goldman Credit
Agreement changed the Goldman Credit Agreement to an $8.9 million multi-draw term loan credit facility (of which approximately $6.4 million was outstanding
and $2.5 million was available to be drawn pursuant to the terms of the Restated Goldman Credit Agreement on substantially similar terms as the then
outstanding amounts owed to the Lender); modified the Goldman Credit Agreement to adjust certain EBITDA calculations in connection with the purchase of
Bango Oil and the sale of the Bango Plant; provided for approval for us to exercise the Purchase Option, enter into and effect the transactions contemplated by
the Membership Interest Purchase Agreement, Subscription Agreement, and the Sale Agreement, and allow for the issuance of the Fox Note and the Mortgage
(each as described and defined above under “Part I - Item 1. Business - 2016 Material Events - Purchase and Sale Agreement, Churchill County, Nevada Plant ”;
confirmed that we were required to make payments of $800,000 per quarter from June 30, 2016 through maturity (May 2, 2019); provided us a moratorium on the
prepayment of amounts owed under the Restated Goldman Credit Agreement as a result of various financial ratios we were required to meet through December
31, 2016; provided for us to retain any business interruption insurance proceeds received in connection with the Bango Plant; provided for us to pay $16 million
received at closing from the sale of the Bango Assets, all amounts released from escrow and any other cash proceeds in excess of $500,000 received from the
Sale Agreement after closing to the Lender as prepayment of amounts due under the Restated Goldman Credit Agreement; allowed us the right to make certain
permitted acquisitions moving forward, without further consent of the Lender, provided that among other requirements, such acquisitions are in the same
business or line of business as the Company, that such acquired businesses have generated consolidated adjusted EBITDA for the four fiscal quarters preceding
such acquisition in excess of capital expenditures for such period (taking into account adjustments acceptable to the Agent for synergies expected to be achieved
within the 90 days following the closing of such acquisition), and that the funding for such acquisition comes from certain limited sources set forth in greater detail
in the Restated Goldman Credit Agreement; adjusted certain fixed charge coverage ratios and leverage ratios we were required to meet on a quarterly basis from
September 30, 2016 to maturity; required us to maintain at least $2 million of liquidity at all times; provided that events of default under the Goldman Credit
Agreement include events of default under the Fox Note; and made various other updates and changes to take into account transactions which had occurred
through the date of such agreement, and to remove expired and non-material terms of the prior Goldman Credit Agreement.
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Amendment No. 1 to Amended and Restated Credit and Guaranty Agreement
On May 9, 2016, we entered into Amendment No. 1 to the Amended and Restated Credit Agreement (“ Amendment No. 1 ”), which amended the Restated
Goldman Credit Agreement. Pursuant to Amendment No. 1, we, Vertex Operating, substantially all of our other wholly-owned subsidiaries, the Lender and the
Agent, agreed to amend the Restated Goldman Credit Agreement to (a) change the threshold constituting a change of control under the Restated Goldman
Credit Agreement, from any time that Benjamin P. Cowart, our Chief Executive Officer, Chairman and largest stockholder, ceases to beneficially own and control
at least 20% on a fully diluted basis of the economic and voting interests of our capital stock (“Fully-Diluted Capital Stock”), to any time that Mr. Cowart beneficially
owns less than 10% of our Fully-Diluted Capital Stock; (b) extend the date that we were required to meet certain fixed charge coverage ratios from the quarter
ending September 30, 2016, to the quarter ending March 31, 2017; (c) adjust the calculation of leverage ratio described in the Restated Goldman Credit
Agreement; (d) allow for the May 2016 Offering and the required payment of $800,000 to the Lender in connection with such May 2016 Offering (representing the
payment originally due June 30, 2016); (e) provide that the financial covenants relating to fixed charge ratios and leverage ratios would not be tested for the
quarters ending September 30, 2016 and December 31, 2016; (f) amend the required timing for certain other post-closing events to occur under the terms of the
Restated Goldman Credit Agreement; and (g) include a release whereby we (and substantially all of our wholly-owned subsidiaries) released the Investor and
Agent for any claims which we had, or could have had, as of the date the parties entered into Amendment No. 1.
On January 29, 2017, the amount borrowed under the EBC Credit Agreement and Revolving Credit Agreement was used to repay amounts owed under
the Restated Goldman Credit Agreement, by and among us, the other financial institutions party thereto as lenders, and Goldman Sachs Bank USA, as
administrative agent for the lenders, which have been repaid in full as of the date of this filing. Additionally, in connection with the repayment of such obligations,
the Goldman Credit Agreement, our right to borrow funds thereunder were terminated.
MidCap Loan Agreement
Effective March 27, 2015, the Company, Vertex Operating and all of the Company’s other subsidiaries other than E-Source and Golden State, entered
into a Loan and Security Agreement with MidCap Business Credit LLC (“MidCap” and the “MidCap Loan Agreement”). Pursuant to the MidCap Loan Agreement,
MidCap agreed to loan us up to the lesser of (i) $7 million; and (ii) 85% of the amount of accounts receivable due to us which meet certain requirements set forth
in the MidCap Loan Agreement (“Qualified Accounts”), plus the lesser of (y) $3 million and (z) 50% of the cost or market value, whichever is lower, of our raw
material and finished goods which have not yet been sold, subject to the terms and conditions of the MidCap Loan Agreement (“Eligible Inventory”), minus any
amount which MidCap may require from time to time in order to over secure amounts owed to MidCap under the MidCap Loan Agreement, as long as no event of
default has occurred or is continuing under the terms of the MidCap Loan Agreement. The requirement of MidCap to make loans under the MidCap Loan
Agreement is subject to certain standard conditions and requirements.
Notwithstanding the above, the parties agreed that until such time as (i) Goldman Sachs was paid at least $9.1 million which was due to it by June 30,
2015 (which amount was timely raised and paid), or (ii) we enter into an amendment with Goldman Sachs to remove the requirement that we make the Required
Payment, the advance rate against Qualified Accounts would be reduced to 53% (compared to 85% after such date) and the advance rate against Eligible
Inventory would be reduced to 31% (compared to 50% after such date). Additionally, the advance rate against Qualified Accounts is reduced by 1% for each
percentage point by which the following calculation, expressed as a percentage, exceeds 3%: (a) actual bad debt write-downs, discounts, advertising allowances,
credits, or other dilutive items, divided by (b) gross sales (excluding non-recurring items), for any applicable period as determined by MidCap. The MidCap Loan
had a balance of $1,744,122 on December 31, 2015.
We were required to make immediate pre-payments of outstanding principal owed under the MidCap Note in the amount certain thresholds are exceeded
as set forth in the MidCap Loan Agreement. We were also required to provide MidCap certain monthly reports and accountings.
We agreed to pay MidCap certain fees in connection with the MidCap Loan Agreement including (a) a non-refundable fee equal to 0.75% of the $7
million credit limit ($52,500), which was due upon our entry into the MidCap Loan Agreement, and is due on each anniversary thereafter; (b) reimbursement for
MidCap’s audit fees incurred from time to time; a collateral monitoring charge of 0.20% of the greater of the average outstanding balance of the MidCap Note (as
defined below) at the end of each month or $3 million; (c) a fee equal to 0.75% of the difference between the credit limit of $7 million and the greater of (i) the
amount actually borrowed, and (ii) $3 million, as calculated in the MidCap Loan Agreement, payable monthly in arrears and added to the balance of the MidCap
Note; and (d) a one-time placement fee equal to 0.50% of the $7 million credit limit which we paid upon our entry into the MidCap Loan Agreement.
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The MidCap Loan Agreement contains customary representations, warranties, covenants for facilities of similar nature and size as the MidCap Loan
Agreement, and requirements for the Company to indemnify MidCap for certain losses. The MidCap Loan Agreement also includes various covenants (positive
and negative), binding the Company and its subsidiaries, including not permitting the availability for loans under the MidCap Loan Agreement to ever be less than
10% of the credit limit ($700,000); prohibiting us from creating liens on any collateral pledged under the MidCap Loan Agreement, subject to certain exceptions;
and prohibiting us from paying any dividends on capital stock, advancing any money to any person, guarantying any debt, creating any indebtedness, and
entering into any transactions with affiliates on terms more favorable than those of an arms-length third party transaction.
The MidCap Loan Agreement includes customary events of default for facilities of a similar nature and size as the MidCap Loan Agreement.
The MidCap Loan Agreement continues in effect until the second anniversary of the parties’ entry into the Agreement, subject to right of the parties,
subject to mutual agreement, to extend such rights and agreement, provided that we have the right to terminate the MidCap Loan Agreement at any time with 60
days prior written notice. In the event we desire to terminate the MidCap Loan Agreement we were required to pay MidCap a termination fee of $70,000, subject
to certain exceptions in the MidCap Loan Agreement. We also have the right to terminate the agreement without providing 60 days’ prior notice as long as we pay
MidCap the equivalent amount of interest which would have been due (as calculated in the MidCap Loan Agreement) for such 60 day period, along with the
$70,000 termination fee. In the event the MidCap Loan Agreement is terminated by MidCap upon the occurrence of an event of default, we were required to pay
MidCap a fee of $70,000 upon such termination.
We also entered into a Revolving Note (the “ MidCap Note”) to evidence amounts borrowed from MidCap from time to time under the MidCap Loan
Agreement. Interest on the MidCap Note accrues at a fluctuating rate equal to the aggregate of: (x) the prime rate then effect, and (y) 1.75% per annum, or at
such other rate mutually agreed on from time to time by the parties, based upon the greater of (i) any balance owing under the MidCap Note at the close of each
day; or (ii) a minimum assumed average daily loan balance of $3 million. Interest is payable in arrears, on the first day of each month that amounts are
outstanding under the MidCap Note.
We and each of our subsidiaries subject to the MidCap Loan Agreement are jointly and severally liable for the repayment of amounts owed under the
MidCap Note. Pursuant to the MidCap Loan Agreement, we granted MidCap a security interest in substantially all of our assets and provided MidCap junior
mortgages on all real estate which we own, subject to the first priority mortgages of the Lender. Finally, MidCap and the Lender entered into an Intercreditor
Agreement, which governs which of the lenders have first and second priority security interests over our assets which are pledged as collateral in order to secure
repayment of the amounts owed pursuant to the Goldman Credit Agreement and MidCap Loan Agreement.
On November 9, 2015, we and certain of our subsidiaries entered into a First Amendment to Loan and Security Agreement (the “ Midcap First
Amendment”), which amended the Midcap Loan Agreement with Midcap. The Midcap First Amendment amended the Midcap Loan Agreement to add Vertex OH
as a party thereto; remove Vertex OH’s requirement to enter into a negative pledge agreement with MidCap; created separate maximum borrowing base credit
limits for Vertex OH’s accounts and customers ($100,000 maximum per customer, subject to certain exceptions); excluded customers who are based outside of
the U.S. or Canada from the credit limits if backed by a bank letter of credit or covered by a foreign receivables insurance policy; removed inventory of Vertex OH
from the definition of Eligible Inventory under the Midcap Loan Agreement; and provided that additional affiliates of the Company may become party to the Midcap
Loan Agreement by executing an assumption agreement and revolving note in favor of Midcap.
On January 29, 2017, the amount borrowed under the EBC Credit Agreement and Revolving Credit Agreement was used to repay amounts owed under
the MidCap Loan Agreement, which have been repaid in full as of the date of this filing. Additionally, in connection with the repayment of such obligations, the
Midcap Loan Agreement, and our right to borrow funds thereunder were terminated.
Fox Note
On January 29, 2016, Vertex OH, borrowed $5.15 million from Fox Encore and provided a Promissory Note to Fox Encore to reflect such borrowed funds
(the “Fox Note”). The Fox Note bears interest at 10% percent per annum (15% upon the occurrence of an event of default), payable monthly in arrears beginning
on February 29, 2016. The principal and all accrued and unpaid interest on the Fox Note is due on the earlier of (a) July 31, 2016 (as may be extended by Vertex
OH as discussed below, the “Maturity Date”), or (b) upon acceleration of the Fox Note during the existence of an event of default as discussed therein. Provided
that no event of default is then existing on the Fox Note or under any other loan document associated therewith, and certain other requirements as described in
the Fox Note are met, Vertex OH has the right to three (3) extension
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options (each, an “Extension Option”) pursuant to which Vertex OH may extend the Maturity Date for six (6) months each. The first extension, which was
exercised as of December 31, 2016 extended the Maturity Date of the Fox Note until January 31, 2017, the second extension will extend the Maturity Date of the
Fox Note until July 31, 2017, and the third extension will extend the Maturity Date of the Fox Note until January 29, 2018. Upon exercising an Extension Option,
Vertex OH is required to pay Fox Encore an extension fee equal to 3% of the then outstanding principal amount of the Fox Note, which amount is separate from,
and is not applied toward, the outstanding indebtedness owed under the Fox Note; provided, however, that if Vertex OH elects to exercise the Extension Option
to extend the Maturity Date to January 31, 2017 (which had been exercised as of December 31, 2016), the 3% fee for such extension is not to be paid in cash but
is instead added to the outstanding principal balance of the Fox Note. The Fox Note may be prepaid in whole or in part at any time without penalty, provided that
if repaid in full by July 31, 2016, the amount to be repaid was to be decreased by $150,000. The Fox Note is secured by the Mortgage described below. The Fox
Note includes certain standard and customary financial reporting requirements, notice requirements, indemnification requirements, covenants and events of
default.
On January 29, 2017 the amount borrowed under the EBC Credit Agreement and Revolving Credit Agreement was used to repay amounts owed under
the Fox Note, which has been repaid in full as of the date of this filing.
Texas Citizens Bank Loan Agreement
On January 7, 2015, E-Source entered into a loan agreement with Texas Citizens Bank to consolidate various smaller debt obligations. The loan
agreement provides a term note in the amount of $2,045,500 that matures on January 7, 2020. Borrowings bear a fixed interest rate of 5.5% per annum and
interest is calculated from the date of each advance until repayment in full or maturity. The loan has 59 scheduled monthly payments of $42,126 which includes
principal and interest. The loan is collateralized by all of the assets of E-Source. The loan contains customary representations, warranties, and covenants for
facilities of similar nature and size.
Unit Offerings
On June 24, 2015, we closed the transactions contemplated by the June 19, 2015 Unit Purchase Agreement (the “ June 2015 Purchase Agreement”) we
entered into with certain institutional investors (the “June 2015 Investors ”), pursuant to which the Company sold the June 2015 Investors an aggregate
of 8,064,534 units (the “June 2015 Units”), each consisting of (i) one share of Series B Preferred Stock and (ii) one warrant to purchase one-half of a share of
common stock of the Company (each a “June 2015 Warrant ” and collectively, the “June 2015 Warrants ”). The June 2015 Units were sold at a price of $3.10 per
June 2015 Unit (the “June 2015 Unit Price ”) (a 6.1% premium to the closing bid price of the Company’s common stock on the NASDAQ Capital Market on the
date the June 2015 Purchase Agreement was entered into which was $2.91 per share (the “June 2015 Closing Bid Price”)). The June 2015 Warrants have an
exercise price of $2.92 per share ($0.01 above the June 2015 Closing Bid Price). Total gross proceeds from the offering of the June 2015 Units (the “June 2015
Offering”) were $25.0 million.
Craig-Hallum Capital Group LLC, the Placement Agent, received a commission equal to 6.5% of the gross proceeds (less $4.0 million raised from certain
investors in the June 2015 Offering for which they will receive no fee) from the June 2015 Offering, for an aggregate commission of $1.365 million which was
netted against the proceeds.
We used the net proceeds from the June 2015 Offering to repay amounts owed under the Goldman Credit Agreement in the amount of $15.1 million.
The Series B Preferred Stock accrues a dividend, payable quarterly in arrears (based on calendar quarters), in the amount of 6% per annum of the
original issuance price of the Series B Preferred Stock ($3.10 per share).
The dividend is payable by the Company, at the Company’s election, in registered common stock of the Company (if available) or cash, provided that any
cash dividend payment is subject to us previously having repaid all amounts owed to our senior lender. In the event dividends are paid in registered common
stock of the Company, the number of shares payable is calculated by dividing (a) the accrued dividend by (b) 90% of the arithmetic average of the volume
weighted average price (VWAP) of the Company’s common stock for the 10 trading days immediately prior to the applicable date of determination (the “June
2015 Dividend Stock Payment Price”). Notwithstanding the foregoing, in no event may the Company pay dividends in common stock unless the applicable June
2015 Dividend Stock Payment Price is above $2.91. If the Company is prohibited from paying, or chooses not to pay, the dividend in cash (due to contractual
senior credit agreements or other restrictions) or is unable to pay the dividend in registered common stock, the dividend will be paid in-kind in Series B Preferred
Stock shares at $3.10 per share.
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The Series B Preferred Stock includes a liquidation preference (in the amount of $3.10 per share) which is junior to the Company’s previously outstanding
shares of preferred stock, except the Series B1 Preferred Stock, which it is pari passu with, senior credit facilities and other debt holders as provided in further
detail in the designation and senior to the Series C Preferred Stock.
The Series B Preferred Stock (including accrued and unpaid dividends) is convertible into shares of the Company’s common stock at the holder’s option
at any time after closing at $3.10 per share (initially a one-for-one basis (subject to adjustments for stock splits and recapitalizations)). If the Company’s common
stock trades at or above $6.20 per share for a period of 20 consecutive trading days the Company may at such time force conversion of the Series B Preferred
Stock (including accrued and unpaid dividends) into common stock of the Company.
The Series B Preferred Stock votes together with the common stock on an as-converted basis, provided that each holder’s voting rights are subject to and
limited by the Series B Beneficial Ownership Limitation described below.
The Company has the option to redeem the outstanding shares of Series B Preferred Stock at $3.10 per share, plus any accrued and unpaid dividends
on such Series B Preferred Stock redeemed, at any time beginning on June 24, 2017, and the Company is required to redeem the Series B Preferred Stock at
$3.10 per share, plus any accrued and unpaid dividends, on June 24, 2020.
The June 2015 Warrants are exercisable beginning on December 26, 2015, and expire on December 24, 2020. The Warrants contain a cashless exercise
provision in connection with any shares that are not then registered by the Company.
Both the Series B Preferred Stock and the June 2015 Warrants contain a provision prohibiting the conversion of the Series B Preferred Stock (and voting
associated therewith) and the exercise of the June 2015 Warrants, into common stock of the Company, if upon such conversion or exercise, as applicable, the
holder thereof would beneficially own more than 9.999% of the Company’s then outstanding common stock (the “Series B Beneficial Ownership Limitation ”). The
Series B Beneficial Ownership Limitation does not apply to forced conversions undertaken by the Company pursuant to the terms of the Designation (summarized
above). In addition to the Series B Beneficial Ownership Limitation, certain of the Investors also entered into agreements with us to limit their ability to effect
conversions of Series B Preferred Stock (and exercise of June 2015 Warrants), to prohibit them contractually from converting (or exercising) such applicable
security if upon such conversion (or exercise) they would beneficially own more than 4.999% of our outstanding common stock. As described above, each
holder’s voting rights in connection with the Series B Preferred Stock are also limited by the Series B Beneficial Ownership Limitation.
In connection with the May 2016 Purchase Agreement described below, certain funds received in that offering totaling $11,189,838 were used to
immediately repurchase and retire 3,575,070 shares of Series B Preferred Stock and pay the accrued but unpaid dividends due thereon and on certain other
shares of Series B Preferred Stock held by those holders (the “Repurchases”). In connection with this transaction, $5,408,131 of unaccreted discount on these
3,575,070 shares of Series B Preferred Stock which were retired, was immediately recognized, which represents the pro-rata portion of the unaccreted discount.
On May 13, 2016, we closed the transactions contemplated by the May 10, 2016 Unit Purchase Agreement (the “ May 2016 Purchase Agreement”) with
certain accredited investors (the “Investors”), pursuant to which we sold the Investors an aggregate of approximately 12 million units (the “ May 2016 Units”), each
consisting of (i) one share of Series B1 Preferred Stock of the Company, $0.001 par value per share (the “Series B1 Preferred Stock”) and (ii) one warrant to
purchase one-quarter of a share of common stock of the Company, $0.001 par value per share (each a “May 2016 Warrant” and collectively, the “May 2016
Warrants”). The May 2016 Units were sold at a price of $1.56 per Unit (the “ May 2016 Unit Price ”) (a 2.6% premium to the closing bid price of the Company’s
common stock on the NASDAQ Capital Market on the date the Purchase Agreement was entered into which was $1.52 per share (the “May 2016 Closing Bid
Price”)). The May 2016 Warrants have an exercise price of $1.53 per share ($0.01 above the Closing Bid Price). Total gross proceeds from the offering of the
Units (the “May 2016 Offering”) were $19.3 million.
A total of approximately $18.6 million of the securities sold in the May 2016 Offering were purchased by investors who participated in the Company’s
prior June 2015 offering of Series B Preferred Stock and warrants to purchase shares of common stock. 60% of the funds received from such investors were used
to immediately repurchase such investors’ Series B Preferred Stock. As a result, a total of approximately $11.2 million of the proceeds raised in the May 2016
Offering were used to immediately repurchase and retire approximately 3.6 million shares of Series B Preferred Stock and pay accrued interest on such
repurchased shares through the closing date (the “Repurchases”), leaving net proceeds of approximately $8.1 million, before deducting placement agents’ fees
and offering expenses. Of these net proceeds, $800,000 was used to pay amounts owed to the Lender, as discussed above and the remaining proceeds for
working capital purposes and potential acquisitions.
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Craig-Hallum Capital Group LLC (the “Placement Agent”) acted as exclusive placement agent in connection with the May 2016 Offering. The Placement
Agent received a commission equal to 6.5% of the net proceeds after affecting the Repurchases described above, from the May 2016 Offering, for an aggregate
commission of approximately $530,000.
The Company’s Chief Executive Officer and Chairman, Benjamin P. Cowart, and the Company’s Chief Financial Officer and Secretary, Chris Carlson,
each purchased 32,052 Units ($50,000 of May 2016 Units) in the May 2016 Offering and in connection with such purchases was issued 32,052 shares of Series
B1 Preferred Stock and May 2016 Warrants to purchase 8,013 shares of common stock.
The Series B1 Preferred Stock accrues a dividend, payable quarterly in arrears (based on calendar quarters), in the amount of 6% per annum of the
original issuance price of the Series B1 Preferred Stock ($1.56 per share or $19.5 million in aggregate), provided that such dividend increases to 9% if the
Consolidated Adjusted EBITDA (defined below) targets described below are not met during the periods indicated below during 2016-2017, until the earlier of (a)
the date the next target is met, or (b) June 30, 2018. “Consolidated Adjusted EBITDA” means the Company’s operating income, plus (i) share-based
compensation expense, (ii) depreciation and amortization, (iii) goodwill impairment charges, (iv) acquisition related expenses, (v) nonrecurring restructuring
charges, and (vi) other non-cash expenses or one-time items, all as calculated in accordance with United States generally accepted accounting principles, as
consistently applied by the Company.
The Consolidated Adjusted EBITDA targets are as follows:
Measurement Period
For the six months ending December 31, 2016
For the three months ending March 31, 2017
For the six months ending June 30, 2017
For the nine months ending September 30, 2017
For the twelve months ending December 31, 2017
Consolidated Adjusted EBITDA
Negative $1,000,000
$1,000,000
$3,500,000
$5,500,000
$7,500,000
The Consolidated Adjusted EBITDA target for the six months ending December 31, 2016 was met.
The dividend is payable by the Company, at the Company’s election, in registered common stock of the Company (if available) or cash, subject to the
terms of the Company’s senior loan documents. In the event dividends are paid in registered common stock of the Company, the number of shares payable will
be calculated by dividing (a) the accrued dividend by (b) 90% of the arithmetic average of the volume weighted average price (VWAP) of the Company’s common
stock for the 10 trading days immediately prior to the applicable date of determination (the “May 2016 Dividend Stock Payment Price ”). Notwithstanding the
foregoing, in no event may the Company pay dividends in common stock unless the applicable May 2016 Dividend Stock Payment Price is above $1.52. If the
Company is prohibited from paying the dividend in cash (due to contractual senior credit agreements or other restrictions) or is unable to pay the dividend in
registered common stock, the dividend will be paid in-kind in additional shares of Series B1 Preferred Stock shares based on the original Unit Price.
The Series B1 Preferred Stock includes a liquidation preference ($1.56 per share) which is junior to the Company’s Series A Preferred Stock, ranks senior
to the Company’s Series C Preferred Stock and ranks equally with the Series B Preferred Stock.
The Series B1 Preferred Stock (including accrued and unpaid dividends) is convertible into shares of the Company’s common stock at the holder’s option
at any time after closing on a one-for-one basis. If the Company’s common stock trades at or above $3.90 per share for a period of 20 consecutive trading days
at any time, the Company may at such time force conversion of the Series B1 Preferred Stock (including accrued and unpaid dividends) into common stock of the
Company.
The Series B1 Preferred Stock votes together with the common stock on an as-converted basis, provided that each holder’s voting rights are subject to
and limited by the Series B1 Beneficial Ownership Limitation described below.
The Company has the option to redeem the outstanding shares of Series B1 Preferred Stock at $1.716 per share plus any accrued and unpaid dividends
on such Series B1 Preferred Stock redeemed, at any time beginning on June 24, 2017 (the two year anniversary of the closing of the Company’s June 2015
offering of Series B Preferred Stock) and the Company is required to redeem the Series B1 Preferred Stock at the Unit Price plus any accrued and unpaid
dividends on June 24, 2020 (the five year anniversary of the closing of the Company’s June 2015 offering of Series B Preferred Stock).
Both the Series B1 Preferred Stock and the June 2015 Warrants contain a provision prohibiting the conversion of the Series B1 Preferred Stock and the
exercise of the Warrants into common stock of the Company, if upon such conversion or exercise,
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
as applicable, the holder thereof would beneficially own more than 9.999% of the Company’s then outstanding common stock (the “ June 2015 Beneficial
Ownership Limitation”). The June 2015 Beneficial Ownership Limitation does not apply to forced conversions undertaken by the Company pursuant to the terms
of the Designation (summarized above). The June 2015 Beneficial Ownership Limitation also applies to the voting rights of the Series B1 Preferred Stock. Certain
of the investors also agreed to contractually reduce the June 2015 Beneficial Ownership Limitation applicable to them to 4.999% of the Company’s then
outstanding common stock.
The May 2016 Warrants have an exercise price of $1.53 per share, are exercisable between November 14, 2016 and November 13, 2021 and have
cashless exercise rights to the extent the shares of common stock issuable upon exercise of the May 2016 Warrants are not registered with the Securities and
Exchange Commission.
The May 2016 Offering terms and the terms of the Series B1 Preferred Stock are described in greater detail in the Current Reports on Form 8-K filed with
the Securities and Exchange Commission on May 10, 2016 and May 13, 2016.
Need for additional funding
Our re-refining business will require significant capital to design and construct any new facilities. 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.
Management believes that the amount remaining from our May 2016 Unit Offering (described above) and the amount available under our EBC Credit
Agreement and Revolving Credit Agreement, in addition to projected earnings, will provide sufficient liquidity to fund our operations for the foreseeable future. If it
is necessary, we will seek additional financing for future operations, acquisitions or other future developments and to repay amounts owed to our creditors or to
redeem our outstanding preferred securities. The required funds may be raised through the sale of common stock, preferred stock, debt, or convertible debt,
which may include the grant of warrants. Our inability to obtain sufficient funds from external sources when such funds are needed will have a material adverse
effect on our plan of operations, results of operations and financial condition.
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. However, such future financing may not be available in amounts or on terms acceptable to us, or at all.
In addition to the above, we may also seek to acquire additional businesses or assets. In addition, the Company could consider selling assets if a more
strategic acquisition presents itself. Finally, in the event we deem such transaction in our best interest, we may enter into a business combination or similar
transaction in the future.
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) the market for, and volatility in, the market for oil and gas;
(3) our ability or inability to generate new revenues; and
(4) the number of shares in our public float.
Furthermore, because our common stock is traded on the NASDAQ Capital Market, our stock price may be impacted by factors that are unrelated or
disproportionate to our operating performance. These market fluctuations, as well as general economic, political and market conditions, such as recessions,
interest rates or international currency fluctuations may adversely affect the market price of our common stock. Additionally, 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 of our company, and may not reflect the actual value of
our common stock. Shareholders and potential investors in our common stock should exercise caution before making an investment in our common stock, and
should not rely on the publicly quoted or traded stock
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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, 2016 compared to the fiscal year ended December 31, 2015 were as follows:
Beginning cash and cash equivalents
Net cash provided by (used in):
Operating activities
Investing activities
Financing activities
Net increase in cash and cash equivalents
Ending cash and cash equivalents
Twelve Months Ended December 31,
2016
2015
765,364 $
6,017,076
(14,145,607)
15,882,986
(801,308)
936,071
1,701,435 $
(12,970,898)
(479,505)
8,198,691
(5,251,712)
765,364
$
$
Operating activities used cash of $ 14,145,607 for the year ended December 31, 2016 as compared to using cash of $ 12,970,898 in 2015. Our primary
sources of liquidity are cash flows from our operations and the availability to borrow funds under our credit and loan facilities, as well as private sales of
securities. The primary reasons for the increase in cash used by operating activities was a gain on sale of assets of $9,631,712 (in connection with the sale of
the Bango Assets), an increase in accounts receivable of $4,636,805, an increase in inventory of $809,647 along with a $5,306,000 decrease in deferred federal
income tax.
Investing activities provided cash of $15,882,986 for the year ended December 31, 2016 as compared to having used $ 479,505 of cash in 2015. Investing
activities for the twelve months ended December 31, 2016 were mainly comprised of $18,995,668 in net proceeds from the sale of assets (in connection with the
sale of the Bango Assets) and purchase of fixed assets of $1,628,859 as compared to the cash used in 2015 was mainly comprised of $1,811,653 in purchase of
fixed assets and the Aaron Oil acquisition expenditure of $1,082,649.
Financing activities used cash of $ 801,308 during the twelve months ended December 31, 2016, as compared to providing cash of $ 8,198,691 in 2015.
Financing activities in 2016 included a net $ 981,918 of net proceeds borrowed from Midcap, $7,552,018 of net proceeds from our Series B and B1 Preferred
Stock offering, and proceeds from notes payable in the amount of $7,650,819 offset by $ 20,986,063 of payments made on notes payable, and proceeds from the
sale of Series C Preferred of $4,000,000. Financing activities in 2015 included a net $1,744,122 of net proceeds borrowed from Midcap, $23,557,553 of proceeds
from our Series B Preferred Stock offering, and proceeds from notes payable in the amount of $2,305,277 offset by $19,419,567 of payments made on notes
payable.
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Contractual Obligations
Future maturities of long term debt as of December 31, 2016 and December 31, 2015 were as follows:
Creditor
Loan Type
Origination Date
Maturity Date
Loan Amount
Balance on
December 31, 2016
Balance on
December 31, 2015
MidCap Revolving Line
of Credit
Goldman Sachs USA
Fox Encore Note
Pacific Western Bank
Texas Citizens Bank
Various institutions
Total
Deferred Finance Costs,
Net
Total, Net of Deferred
Finance Costs
Revolving Note
March 2015
March, 2017
7,000,000
2,726,039
1,744,122
Term Loan-Restated Credit
Agreement
Promissory Note
Capital Lease
Term Note
Insurance premiums
financed
May, 2014
January 29, 2016
September, 2012
January, 2015
May 2, 2019
July 31, 2017
August, 2017
January, 2020
8,900,000
5,150,000
3,154,860
2,045,500
4,000,000
5,150,000
133,153
1,531,506
22,400,000
—
320,101
1,974,107
Various
< 1 year
2,902,428
1,060,065
515,762
14,600,763
26,954,092
(244,178)
(1,693,872)
29,152,788
14,356,585
25,260,220
Future contractual maturities on notes payable are summarized as follows:
Creditor
2017
2018
2019
2020
2021
Thereafter
MidCap Revolving Line of Credit
$
2,726,039 $
— $
— $
— $
— $
Goldman Sachs USA
Fox Encore Note
Pacific Western Bank
Texas Citizens Bank
Various institutions
3,200,000
5,150,000
133,153
468,225
1,060,065
800,000
—
—
495,013
—
Totals
Deferred Finance Costs, Net
12,737,482
(229,008)
1,295,013
(7,585)
—
—
—
523,333
—
523,333
(7,585)
—
—
—
44,935
—
44,935
—
—
—
—
—
—
—
—
Totals, Net of Deferred Finance Costs
$
12,508,474 $
1,287,428 $
515,748 $
44,935 $
— $
—
—
—
—
—
—
—
—
—
The Company has various leases for office facilities and vehicles which are classified as operating leases, and which expire at various times through
2032. Total rent expense for all operating leases for 2016 and 2015 is summarized as follows:
Office leases
Plant Leases
Vehicle leases
2016
2015
$
$
875,320 $
4,052,250
365,877
5,293,447 $
620,219
3,996,000
326,476
4,942,695
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Minimum future lease commitments as of December 31, 2016, are summarized as follows:
Year ending December 31
Office Facilities
Vehicles
Plant Leases
2017
2018
2019
2020
2021
Thereafter
$
$
466,266 $
391,050
384,500
345,000
342,000
3,275,000
5,203,816 $
231,084 $
115,665
57,956
—
—
—
404,705 $
3,646,000
1,132,000
—
—
—
—
4,778,000
Our contractual obligations are included in our consolidated financial statements and the related notes thereto and appear under the caption “Financial
Statements” beginning on page F-1 of this Annual Report on Form 10-K.
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 financial statements included herein).
Goodwill and Goodwill Impairment.
Goodwill is the excess of cost of an acquired entity over the amounts assigned to identifiable assets acquired and liabilities assumed in a business
combination. We perform a goodwill impairment analysis at least annually, unless indicators of impairment exist in interim periods. The goodwill impairment
assessment is based on several factors requiring judgment and is based on how our Chief Executive Officer and Chief Financial Officer manage the business.
Each of our three operating segments, Black Oil, Refining and Marketing, and Recovery, constitutes a reportable segment for purposes of reviewing impairment
and the recoverability of goodwill and other intangible assets. We must make various assumptions in determining their estimated fair values regarding estimated
future cash flows and other factors in determining the fair values of the reportable segments. We performed a qualitative assessment (commonly referred to as a
"Step 0" test) to determine if it was more likely than not that the fair value of each of our reportable segments with goodwill exceeded their carrying value. In
making this assessment, we evaluated overall business and overall macroeconomic conditions since the date of our last quantitative assessment. We considered
in our qualitative assessment, among other things, expectations of projected revenues and cash flows, trends in market multiples, changes in our stock price,
changes in the carrying values of our reportable segments with goodwill, and overall market conditions. Based on this evaluation, we concluded that our goodwill
was likely impaired and performed a quantitative Step One assessment. A quantitative Step One assessment involves determining the fair value of each
reportable segment using market participant assumptions along with a discounted cash flow approach. As we believe that the carrying value of certain reportable
segments with goodwill did not exceed their estimated fair value, we performed a quantitative Step Two assessment. A quantitative Step Two assessment
compares the carrying value of the reportable segment to the fair value of all of the assets and liabilities of the reportable segment (including any unrecognized
intangibles) as if the reportable segment was acquired in a business combination. If the carrying amount of a reportable segment's goodwill exceeds the implied
fair value of its goodwill, an impairment loss is recognized in an amount equal to the excess.
We recognized a $4,922,353 Goodwill Impairment in 2015, which eliminated the goodwill balance. This result occurred primarily due to the adverse
impact of recently declining oil prices on current and anticipated future oil activity. At December 31, 2016 and 2015, there was no goodwill recorded. Our Refining
and Marketing segment did not have any goodwill recorded as of December 31, 2016 or 2015.
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. Revenue is also recognized as recovered scrap materials are sold.
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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.
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.
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. The Company determined that no long-lived asset impairment existed at December 31, 2016 but in 2015 the Company did
recognize a long-lived asset impairment related to the Recovery Segment.
Derivative liabilities.
The Company, in accordance with ASC 815-40-25 and ASC 815-10-15 Derivatives and Hedging and ASC 480-10-25 Liabilities-Distinguishing from Equity,
convertible preferred shares are accounted for net, outside of shareholders' equity and warrants are accounted for as liabilities at their fair value during periods
where they can be net cash settled in case of a change in control transaction. The warrants are accounted for as a liability at their fair value at each reporting
period. The value of the derivative warrant liability will be re-measured at each reporting period with changes in fair value recorded as earnings. To derive an
estimate of the fair value of these warrants, a Dynamic Black Scholes model is utilized that computes the impact of a possible change in control transaction upon
the exercise of the warrant shares. This process relies upon inputs such as shares outstanding, estimated stock prices, strike price and volatility assumptions to
dynamically adjust the payoff of the warrants in the presence of the dilution effect.
Preferred Stock Classification.
A mandatorily redeemable financial instrument shall be classified as a liability unless the redemption is required to occur only upon the liquidation or
termination of the reporting entity. A financial instrument issued in the form of shares is mandatorily redeemable if it embodies an unconditional obligation
requiring the issuer to redeem the instrument by transferring its assets at a specified or determinable date (or dates) or upon an event certain to occur. A financial
instrument that embodies a conditional obligation to redeem the instrument by transferring assets upon an event not certain to occur becomes mandatorily
redeemable-and, therefore, becomes a liability-if that event occurs, the condition is resolved, or the event becomes certain to occur. The Series B preferred stock
and Series B1 preferred stock requires the Company to redeem such preferred stock on the fifth anniversary of
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
the issuance of the Series B Preferred stock if the redemption would not be subject to then existing restrictions under the Company's prior senior credit
agreement. SEC reporting requirements provide that any possible redemption outside of the control of the Company requires the preferred stock to be classified
outside of permanent equity.
Market Risk
Our revenues and cost of revenues are affected by fluctuations in the value of energy related products. We attempt to mitigate much of the risk
associated with the volatility of relevant commodity prices by using our knowledge of the market to obtain feedstock at attractive costs, by efficiently managing the
logistics associated with our products, by turning our inventory over quickly, and by selling our products into markets where we believe we can achieve the
greatest value.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Commodity Price Risk
We are exposed to market risks related to the volatility of crude oil and refined oil products. Our financial results can be significantly affected by changes
in these prices which are driven by global economic and market conditions. We attempt to mitigate much of the risk associated with the volatility of relevant
commodity prices by using our knowledge of the market to obtain feedstock at attractive costs, by efficiently managing the logistics associated with our products,
by turning our inventory over quickly, and by selling our products into markets where we believe we can achieve the greatest value.
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Item 8. Financial Statements and Supplementary Data
VERTEX ENERGY, INC.
TABLE OF CONTENTS TO FINANCIAL STATEMENTS
Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
F-1
Page
F-2
F-3
F-5
F-6
F-7
F-9
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Vertex Energy, Inc.
We have audited the accompanying consolidated balance sheets of Vertex Energy, Inc. and subsidiaries (collectively, the “Company”) as of
December 31, 2016 and 2015, and the related consolidated statements of operations, stockholder’s equity and cash flows for 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Vertex
Energy, Inc. and subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for the years then ended
in conformity with U.S. generally accepted accounting principles.
/s/ Hein & Associates LLP
Houston, Texas
March 13, 2017
F-2
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
ASSETS
Current assets
Cash and cash equivalents
Escrow - current restricted cash
Accounts receivable, net
Inventory
Prepaid expenses
Assets being held for sale
Total current assets
Non-current assets
Fixed assets, at cost
Less accumulated depreciation
Net fixed assets
Intangible assets, net
Other assets
Total non-current assets
TOTAL ASSETS
LIABILITIES, TEMPORARY EQUITY AND EQUITY
Current liabilities
Accounts payable and accrued expenses
Dividends payable
Capital leases
Current portion of long-term debt, net of unamortized finance costs
Revolving note
Deferred revenue
Total current liabilities
Long-term liabilities
Long-term debt, net of unamortized finance costs
Derivative liability
Total liabilities
COMMITMENTS AND CONTINGENCIES (See Note 4)
TEMPORARY EQUITY
Series B preferred stock, $0.001 par value per share;
VERTEX ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2016 December 31, 2015
$
$
$
1,701,435 $
1,504,723
10,952,219
4,357,958
2,669,117
—
21,185,452
62,316,808
(12,286,874)
50,029,934
15,252,332
518,250
65,800,516
86,985,968 $
9,440,696 $
504,474
133,153
9,649,282
2,726,039
—
22,453,644
1,848,111
4,365,992
28,667,747
765,364
—
6,315,414
3,548,311
1,367,442
11,170,243
23,166,774
60,846,824
(7,818,217)
53,028,607
16,967,985
481,450
70,478,042
93,644,816
13,244,388
376,571
186,948
17,789,491
1,744,122
323,891
33,665,411
5,539,659
1,548,604
40,753,674
—
—
10,000,000 shares authorized, 3,229,409 and 8,160,809 shares issued
and outstanding at December 31, 2016 and 2015, respectively with liquidation preference of $10,011,168 and $25,298,508 at
December 31, 2016 and 2015, respectively.
3,331,918
11,955,207
Series B-1 preferred stock, $0.001 par value per share;
17,000,000 shares authorized, 12,282,638 and 0 shares issued
and outstanding at December 31, 2016 and 2015, respectively with liquidation preference of $19,160,915 and 0 at December
31, 2016 and 2015, respectively.
13,756,184
—
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 BALANCE SHEETS
December 31, 2016 December 31, 2015
EQUITY
50,000,000 of total Preferred shares authorized:
Series A Convertible Preferred stock, $0.001 par value;
5,000,000 shares authorized and 492,716 and 612,943 shares issued
and outstanding at December 31, 2016 and 2015, respectively, with a liquidation preference of $734,147 and $913,285 at
December 31, 2016 and December 31, 2015, respectively.
Series C Convertible Preferred stock, $0.001 par value per share;
44,000 shares designated in 2016; 31,568 and 0
issued and outstanding at December 31, 2016 and 2015, respectively with a liquidation preference of $3,156,800 and $0 at
December 31, 2016 and December 31, 2015, respectively.
Common stock, $0.001 par value per share;
750,000,000 shares authorized; 33,151,391 and 28,239,276
issued and outstanding at December 31, 2016 and 2015, respectively, with 1,108,928 shares held in escrow at December 31,
2016.
Additional paid-in capital
Accumulated deficit
Total Vertex Energy, Inc. stockholders' equity
Non-controlling interest
Total Equity
TOTAL LIABILITIES, TEMPORARY EQUITY AND EQUITY
See accompanying notes to the consolidated financial statements
F-4
493
613
32
—
33,151
69,051,124
(27,958,578)
41,126,222
103,897 $
41,230,119 $
86,985,968 $
28,239
53,014,054
(12,106,971)
40,935,935
—
40,935,935
93,644,816
$
$
$
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
VERTEX ENERGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2016 and 2015
Revenues
Cost of revenues (exclusive of depreciation shown separately below)
Gross profit
Reduction of contingent liability
Selling, general and administrative expenses
Depreciation and amortization
Acquisition related expenses
Total selling, general and administrative expenses
Loss from operations
Other income (expense):
Provision for doubtful accounts
Goodwill impairment
Other income (expense)
Gain (loss) on sale of assets
Gain on change in value of derivative liability
Realized gain (loss) on futures contracts
Interest expense
Total other income (expense)
Loss before income taxes
Income tax benefit (expense)
Net loss
Net income attributable to non-controlling interest
Net loss attributable to Vertex Energy, Inc.
Accretion of discount on series B and B-1 Preferred Stock
Accrual of dividends on series B and B-1 Preferred Stock and retirement of a portion of Series B and B-1 Preferred
discount
Net loss available to common shareholders
Earnings per common share
Basic
Diluted
Shares used in computing earnings per share
Basic
Diluted
See accompanying notes to the consolidated financial statements
F-5
$
$
$
$
$
2016
98,078,914 $
81,759,814
16,319,100
2015
146,942,461
136,246,273
10,696,188
—
19,966,426
6,277,215
187,973
26,431,614
(6,069,000)
24,046,464
6,636,593
175,172
24,789,229
(10,112,514)
(14,093,041)
—
—
5,974
9,631,712
49,876
(548,380)
(3,094,956)
6,044,226
(4,068,288)
117,646
(3,950,642)
2,179
(3,952,821) $
(654,820)
(4,922,353)
(4,446)
13,944
5,479,463
551,090
(3,580,726)
(3,117,848)
(17,210,889)
(5,306,000)
(22,516,889)
—
(22,516,889)
(1,762,378)
(805,742)
(9,822,196)
(780,069)
(15,537,395) $
(24,102,700)
(0.51) $
(0.51) $
(0.86)
(0.86)
30,520,820
30,520,820
28,181,096
28,181,096
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
VERTEX ENERGY, INC.
CONSOLIDATED STATEMENTS OF EQUITY
FOR THE YEARS ENDING DECEMBER 31, 2016 AND 2015
Common Stock
Series A Preferred
Series C Preferred
Additional
Shares
$.001 Par
Shares
$.001 Par
Shares
$.001 Par
Paid-in
Capital
Retained
Earnings
Non-
controlling
Interest
Total Equity
Balance on December 31, 2014
28,108,105 $
28,109
630,419 $
630
— $
— $ 46,595,472 $
11,995,761 $
— $ 58,619,972
Share based compensation
expense, total
Exercise of stock options and
warrants
Issuance of restricted common
stock
Conversion of preferred A stock to
common
Conversion of preferred B stock to
common
Beneficial conversion feature on
Preferred B
Dividends declared on Preferred B
shares
Accretion of redemption discount
Preferred B
Net loss
—
25,000
56,180
—
25
56
—
—
—
—
—
—
17,476
17
(17,476)
(17)
32,515
—
—
—
—
32
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Balance on December 31, 2015
28,239,276
28,239
612,943
613
53,271
53
244,000
244
1,108,928
1,109
—
—
—
—
—
—
—
—
—
—
120,227
120
(120,227)
(120)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Exercise of stock options and
warrants
Issuance of common stock to pay
"rent" prior to Bango Sale
Issuance of restricted common
stock - Bango Sale
Issuance of common stock
options and warrants -
Compensation Expense
Conversion of Series A Preferred
stock to common
Issuance of Series C Preferred
stock
Conversion of Series C Preferred
stock to common
Beneficial Conversion Feature-
Series B & B-1 Preferred Stock
Series B Preferred Buy Back
Series B & B-1 Preferred stock -
Dividends declared
Series B & B-1 Preferred stock -
accretion of redemption discount
Conversion of Series B & B-1
Preferred stock to common
Reclass Non-controlling interest
Net loss
Balance on December 31,
2016
—
423,910
—
11,225
—
199,944
—
—
—
100,763
—
5,682,740
—
—
—
—
—
—
—
—
—
—
(780,101)
—
—
(805,742)
(22,516,889)
53,014,054
(12,106,971)
—
(53)
—
243,756
—
—
—
—
—
—
—
—
—
—
—
—
—
423,910
11,250
200,000
—
100,795
5,682,740
(780,101)
(805,742)
(22,516,889)
40,935,935
—
244,000
—
(1,109)
—
—
—
—
527,869
—
—
4,887,252
—
—
—
—
—
—
—
527,869
—
—
4,000,000
—
—
—
4,887,252
(5,408,131)
(5,408,131)
(3,397,665)
—
(3,397,665)
—
(1,762,378)
—
(1,762,378)
6,119,138
261,492
—
(1,016,400)
(314,212)
(3,952,821)
—
103,897
5,104,881
51,177
(3,952,821)
—
—
1,243,200
1,243
—
—
—
—
—
—
—
—
2,142,489
—
—
2,143
—
—
—
—
—
—
—
—
—
—
—
—
44,000
44
3,999,956
—
(12,432)
(12)
(1,231)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
33,151,391 $ 33,151
492,716 $
493
31,568 $
32 $ 69,051,124 $ (27,958,578) $
103,897 $ 41,230,119
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.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDING DECEMBER 31, 2016 AND 2015
Cash flows from operating activities
Net loss
Adjustments to reconcile net loss to cash used in operating activities:
Stock-based compensation expense
Depreciation and amortization
Bad debt expense
Rent paid by common stock
Gain on sale of assets
Deferred financing costs write off
Deferred federal income tax
Increase in fair value of derivative liability
Reduction in contingent consideration
Impairment of goodwill
Changes in operating assets and liabilities:
Accounts receivable
Inventory
Prepaid expenses
Costs in excess of billings
Accounts payable and accrued expenses
Deferred revenue
Other
Net cash used in operating activities
Cash flows from investing activities
Note receivable
Payments on capital leases
Proceeds from sale of assets
Costs related to sale of assets
Establish escrow account - restricted cash
Proceeds from the sale of assets
Acquisitions
Purchase of fixed assets
Net cash provided by (used in) investing activities
Cash flows from financing activities
Line of credit proceeds (payments), net
Proceeds from exercise of common stock options and warrants
Proceeds from sale of Series C Preferred Stock
Purchase/buy back/sale/conversion Series B and B-1 Preferred Stock
Proceeds from issuance of Series B and B-1 Preferred Stock
Issuance costs of Series B and B-1 Preferred Stock
Proceeds from notes payable
Payments made on notes payable
Net cash provided by (used in) financing activities
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of the period
Cash and cash equivalents at end of period
2016
2015
$
(3,952,821) $
(22,516,889)
527,869
6,277,215
—
244,000
(9,631,712)
1,390,727
—
(49,876)
—
—
(4,636,805)
(809,647)
(1,250,496)
—
(1,893,370)
(323,891)
(36,800)
423,911
6,636,593
654,820
—
—
—
5,306,000
(5,479,463)
(6,069,000)
4,922,353
1,929,871
9,072,305
48,438
779,285
(8,539,803)
(139,319)
—
(14,145,607)
(12,970,898)
—
—
29,788,114
(10,792,446)
(1,504,723)
20,900
—
(1,628,859)
15,882,986
981,918
—
4,000,000
(11,189,849)
19,349,757
(607,890)
7,650,819
(20,986,063)
(801,308)
936,071
765,364
$
1,701,435 $
2,495,180
(172,654)
—
—
—
92,271
(1,082,649)
(1,811,653)
(479,505)
1,744,122
11,306
—
—
23,557,553
—
2,305,277
(19,419,567)
8,198,691
(5,251,712)
6,017,076
765,364
See accompanying notes to the consolidated financial statements
F-7
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
SUPPLEMENTAL INFORMATION
Cash paid for interest during the year
Cash paid for income taxes during the year
NON-CASH INVESTING AND FINANCING TRANSACTIONS
Conversion of Series A Preferred Stock into common stock
Conversion of Series B and B1 Preferred Stock into common stock
$
$
$
$
Dividends-in-Kind accrued on Series B and B-1 Preferred Stock and retirement of a portion of the Series B Preferred Stock $
Beneficial conversion feature for Series B and B-1 Preferred Stock
Accretion of discount on Series B and B-1 Preferred Stock
Fair value of warrants issued with Series B and B-1 Preferred Stock
Common shares issued as payment
$
$
$
$
See accompanying notes to the consolidated financial statements
F-8
1,688,628 $
3,563,145
— $
120 $
5,104,881 $
9,822,196 $
4,887,252 $
1,762,378 $
2,867,264 $
244,000 $
—
17
100,795
779,310
5,682,741
1,585,843
—
200,000
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
VERTEX ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016
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.
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 three principal divisions are comprised of Black Oil, Refining and Marketing, and
Recovery.
After considering the Company’s historical negative cash flow from operating activities as well as its working capital deficit of $1,268,192 at December 31, 2016, it
does not appear the Company will meet its obligations as they become due within one year following the date the financial statements are issued. Management
evaluated the significance of the potential negative cash flows and determined that borrowing availability under the new Loan Agreement (as described in "Note
19. Subsequent Events") would be sufficient to alleviate concerns about the Company’s ability to continue as a going concern. The Company entered into a Loan
Agreement with Encina Business Credit LLC providing the ability of Management to request up to $30.0 million available under the Loan Agreement if necessary
to fund operations through March 31, 2018.
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 procures 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
procurement and sale agreements with the suppliers and customers, respectively. These contracts are beneficial to all parties involved because they ensure a
minimum volume is procured from collectors, a minimum volume is sold to the customers, and the Company is insulated from inventory risk by a spread between
the costs to acquire used oil and the revenues received from the sale and delivery of used oil. In addition, the Company operates its own re-refining operations at
the Cedar Marine Terminal, in Baytown, Texas, which uses the Company's proprietary Thermal Chemical Extraction Process (“TCEP”) technology to re-refine the
used oil into marine fuel cutterstock and a higher-value feedstock for further processing. The finished product is then sold by barge as a fuel oil cutterstock and a
feedstock component for major refineries. Although today we are currently utilizing the TCEP technology as a pre-treatment process for the used motor oil
feedstock that is being supplied from our CMT facility and delivered to Marrero for further re-refining. Through the operations at our Marrero, Louisiana facility, we
produce a Vacuum Gas Oil (VGO) product from used oil re-refining which is then sold via barge to end users to utilize in a refining process or a fuel oil blend.
Through the operations at our Columbus, Ohio facility we produce a base oil finished product which is then sold via truck or rail car to end users for blending,
packaging and marketing of lubricants.
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 agreement in place with KMTEX, LLC. (“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-9
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Recovery
Through its Recovery division, which has been operational since 2002, Vertex Energy generates solutions for the proper recovery and management of
hydrocarbon streams. The Company also provides industrial dismantling, demolition, decommissioning, investment recovery, and marine salvage services in
industrial facilities. The Company owns and operates a fleet of trucks and heavy equipment used for processing, shipping and handling of reusable process
equipment and other scrap.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Significant intercompany accounts and
transactions have been eliminated in consolidation. The subsidiaries are as follows:
•
•
•
•
•
•
•
•
Cedar Marine Terminals, L.P. (“ 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 Carriers, L.P. (“Crossroad”) is a 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. (“ Vertex Recovery”) 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. It facilitates its services through a network of independent recyclers and franchise
collectors.
H&H Oil, L.P. (“ H&H Oil”) collects and recycles used oil and residual materials from customers based in Austin, Baytown, Dallas, San Antonio and Corpus
Christi, Texas.
E-Source Holdings, LLC (“ E-Source”) provides dismantling and demolition services at industrial facilities throughout the Gulf Coast.
Vertex Refining, LA, LLC is a used oil re-refinery based in Marrero, Louisiana and also has assets in Belle Chasse, Louisiana.
Vertex Refining, NV, LLC ("Vertex Refining") is a base oil marketing and distribution company with customers throughout the United States.
Vertex Recovery Management, LLC is currently buying and preparing ferrous and non-ferrous scrap intended for large haul barge sales.
• Golden State Lubricant Works, LLC ("Golden State") previously operated an oil storage and blend facility based in Bakersfield, California.
•
•
Vertex Refining, OH, LLC collects and re-refines used oil and residual materials from customers throughout the Midwest. Refinery operations are based in
Columbus, Ohio and has collection branches located in Norwalk, Ohio, Zanesville, Ohio, Ravenswood, West Virginia, and Mt. Sterling, Kentucky.
Vertex Energy Operating, LLC (" Vertex Operating"), a holding company for various of the subsidiaries described above.
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.
F-10
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Accounts receivable
Accounts receivable represents amounts due from customers. Accounts receivable are recorded at invoiced amounts, net of reserves and allowances, do not
bear interest and are not collateralized. The Company uses its best estimate to determine the required allowance for doubtful accounts based on a variety of
factors, including the length of time receivables are past due, economic trends and conditions affecting its customer base, significant one-time events and
historical write-off experience. Specific provisions are recorded for individual receivables when we become aware of a customer’s inability to meet its financial
obligations. The Company reviews the adequacy of its reserves and allowances quarterly.
Receivable balances greater than 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 allowance was $1,646,274 and $1,965,335
at December 31, 2016 and 2015, respectively.
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. The Company reviews its inventory commodities whenever events or circumstances indicate that the value may not be recoverable.
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.
Asset Retirement Obligations
The Company records a liability, which is referred to as an asset retirement obligation, at fair value for the estimated cost to retire a tangible long-lived asset at
the time the Company incurs that liability, which is generally when the asset is purchased, constructed, or leased. The Company records the liability when it has a
legal obligation to incur costs to retire the asset and when a reasonable estimate of the fair value of the liability can be made. If a reasonable estimate cannot be
made at the time the liability is incurred, the Company records the liability when sufficient information is available to estimate the liability’s fair value.
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. During 2015, the Company recognized there was no remaining useful life for the
intangible assets related to our E-Source acquisition and we fully amortized these intangibles, see Note 7.
Goodwill
Goodwill is the excess of cost of an acquired entity over the amounts assigned to identifiable assets acquired and liabilities assumed in a business combination. In
accordance with the FASB ASC 350, “Intangibles - Goodwill and Other,” goodwill is not amortized. We periodically, at least on an annual basis, review goodwill,
considering factors such as projected cash flows and revenue and earnings multiples, to determine whether the carrying value of the goodwill is impaired. If the
goodwill is deemed to be impaired, the difference between the carrying amount reflected in the financial statements and the estimated fair value is recognized as
an expense in the period in which the impairment occurs. We define our reportable segments to be the same as our operating segments for purposes of
reviewing impairment and the recoverability of goodwill and other intangible assets. See Note 6 for more information on our goodwill impairment assessment.
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 and third party processing facility via barge. Revenue is also recognized as recovered scrap materials are sold.
F-11
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Leases
The Company recognizes lease expense on a straight-line basis over the minimum lease terms which expire at various dates through 2032. 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 terms as described above.
Leasehold improvements made during the lease term are also amortized over the shorter of the assets life or the remaining lease term.
For capital leases assumed as a result of an acquisition, the leased assets owned by the acquiree and financed through a capital lease are measured separately,
at fair value, from the underlying lease to which they are subject. The present value of the lease is then calculated using the lease terms and implicit interest rate.
For operating leases assumed as a result of an acquisition, the lease terms are measured, at acquisition date, to determine if the terms are favorable or
unfavorable when compared to a comparable market lease with similar terms.
Business Combinations
The Company accounts for business combinations using the acquisition method of accounting. The results of operations for the acquired entities are included in
the Company’s consolidated financial results from their associated acquisition dates. The Company allocates the purchase price of acquisitions to the tangible
assets, liabilities, and identifiable intangible assets acquired based on their estimated fair values. A portion of purchase price for our acquisitions is contingent
upon the realization of certain operating results. The fair values assigned to identifiable intangible assets acquired and contingent consideration were determined
by third party specialists engaged by the Company on a case by case basis. The excess of the purchase price over the fair value of the identified assets and
liabilities has been recorded as goodwill. If the purchase price is under the fair value of the identified assets and liabilities, a bargain purchase is recognized and
included in income from continuing operations.
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.
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 approximate their fair values due to
the immediate or short-term maturities of these financial instruments.
Use of estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities, and reported amounts of revenue
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
and expenses. Actual results could differ from these estimates. Any effects on the business, financial position or results of operations from revisions to these
estimates are recorded in the period in which the facts that give rise to the revision become known.
Significant items subject to estimates and assumptions include the carrying amount and useful lives of property and equipment and intangible assets, impairment
assessments, share-based compensation expense, and valuation allowances for accounts receivable, inventories, and deferred tax assets.
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. The Company performed an impairment analysis of these long-lived assets based on undiscounted cash flows and there was no impairment at
December 31, 2016 and 2015.
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.
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.
The loss during the quarter ended March 31, 2015 put the Company in an accumulated loss position for the cumulative 12 quarters then ended. The Company
did not have sufficient positive evidence to overcome the recent losses and determined it was more likely than not the deferred tax assets would not be realized
as of March 31, 2015. As a result, we created a net valuation reserve of $5,306,000 to offset our entire balance of deferred tax assets of $11,702,000 less our
$6,436,000 balance of deferred tax liabilities. This resulted in a net book tax expense of $5,306,000 in 2015.
Derivative liabilities
The Company, in accordance with ASC 815-40-25 and ASC 815-10-15 Derivatives and Hedging and ASC 480-10-25 Liabilities-Distinguishing from Equity,
convertible preferred shares are accounted for net, outside of shareholders' equity and warrants are
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
accounted for as liabilities at their fair value during periods where they can be net cash settled in case of a change in control transaction. The warrants are
accounted for as a liability at their fair value at each reporting period. The value of the derivative warrant liability will be re-measured at each reporting period with
changes in fair value recorded as earnings. To derive an estimate of the fair value of these warrants, a Dynamic Black Scholes model is utilized that computes
the impact of a possible change in control transaction upon the exercise of the warrant shares. This process relies upon inputs such as shares outstanding,
estimated stock prices, strike price and volatility assumptions to dynamically adjust the payoff of the warrants in the presence of the dilution effect.
Preferred Stock Classification
A mandatorily redeemable financial instrument shall be classified as a liability unless the redemption is required to occur only upon the liquidation or termination of
the reporting entity. A financial instrument issued in the form of shares is mandatorily redeemable if it embodies an unconditional obligation requiring the issuer to
redeem the instrument by transferring its assets at a specified or determinable date (or dates) or upon an event certain to occur. A financial instrument that
embodies a conditional obligation to redeem the instrument by transferring assets upon an event not certain to occur becomes mandatorily redeemable-and,
therefore, becomes a liability-if that event occurs, the condition is resolved, or the event becomes certain to occur. The Series B preferred stock and Series B1
preferred stock requires the Company to redeem such preferred stock on the fifth anniversary of the issuance of the Series B Preferred stock if the redemption
would not be subject to then existing restrictions under the Company's prior senior credit agreement. SEC reporting requirements provide that any possible
redemption outside of the control of the Company requires the preferred stock to be classified outside of permanent equity.
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
Diluted net income (loss) per share is computed by dividing the net income (loss) attributable to common shareholders by the weighted average number of
common and common equivalent shares outstanding during the period. Common share equivalents included in the diluted computation represent shares issuable
upon assumed exercise of stock options and warrants using the treasury stock and “if converted” method. For periods in which net losses are incurred, weighted
average shares outstanding is the same for basic and diluted loss per share calculations, as the inclusion of common share equivalents would have an anti-
dilutive effect.
New Accounting Pronouncements
(a) Application of New Accounting Standards
On August 27, 2014, the FASB (the “ board”) issued Accounting Standards Update ("ASU") No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to
Continue as a Going Concern, which requires management to assess a company’s ability to continue as a going concern and to provide related footnote
disclosures in certain circumstances. Before this new standard, there was minimal guidance in U.S. GAAP specific to going concern. Under the new standard,
disclosures are required when conditions give rise to substantial doubt about a company’s ability to continue as a going concern within one year from the financial
statement issuance date. The new standard applies to all companies and is effective for the annual period ending after December 15, 2016, and all annual and
interim periods thereafter. The adoption of ASU 2014-15 in fiscal 2016 resulted in no impact to our consolidated financial statements.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Effective January 3, 2016, the Company adopted the accounting guidance in Accounting Standards Update (“ ASU”) No. 2015-16, " Business Combinations:
Simplifying the Accounting for Measurement Period Adjustments." This update simplifies the accounting for measurement-period adjustments in a business
combination by requirement the acquirer to recognize adjustments to provisional amounts identified during the measurement period in the reporting period in
which the adjustments are determined. The acquirer is also required to record in the reporting period in which the adjustments are determined the effect on
earnings of changes in depreciation, amortization, and other items resulting from the change to the provisional amounts. The adoption of this ASU 2015-16 did
not have an impact on our consolidated financial condition and results of operations.
Effective January 1, 2017, the Company adopted the accounting guidance in Accounting Standards Update (“ ASU”) No. 2015-17, " Balance Sheet Classification
of Deferred Taxes." This ASU requires that deferred tax assets and liabilities be classified as non-current in the statement of financial position. The adoption of
ASU 2015-17 in fiscal 2016 resulted in no impact to our consolidated financial statements. See "Note 11. Income Taxes" for a discussion of our income taxes.
Effective January 1, 2015, the Company adopted the accounting guidance in Accounting Standards Update (“ ASU”) No. 2014-08, “ Presentation of Financial
Statements and Property, Plant, and Equipment - Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, ” which amends
the definition of a discontinued operation by raising the threshold for a disposal to qualify as discontinued operations. The ASU also requires entities to provide
additional disclosures about discontinued operations as well as disposal transactions that do not meet the discontinued operations criteria. The Company is
following this guidance.
(b) New Accounting Requirements and Disclosures
In February 2016, the Financial Accounting Standards Board (“ FASB”) issued ASU No. 2016-02, “Leases.” This update was issued to increase transparency and
comparability amount organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing
arrangements. The Company is currently evaluating the effect that implementation of this update will have on its consolidated financial position and results of
operations.
In March 2016, the Financial Accounting Standards Board (“ FASB”) issued ASU No. 2016-09, “Compensation-Stock Compensation: Improvements to Employee
Share-Based Payment Accounting.” This update addresses the simplification of accounting for employee share-based payment transactions as it pertains to
income taxes, the classification of awards as equity or liabilities, accounting for forfeitures, statutory tax withholding requirements, and certain classifications on
the statements of cash flows. The Company is currently evaluating the effect that implementation of this update will have on its consolidated financial position and
results of operations.
In July 2015, the Financial Accounting Standards Board (“ FASB”) issued ASU No. 2015-11, “Simplifying the Measurement of Inventory.” This update requires the
measurement of inventory at the lower of cost of net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less
reasonable predictable costs of completion, disposal and transportation. The Company is currently evaluating the effect that implementation of this update will
have on its consolidated financial position and results of operations.
In May 2014, the Financial Accounting Standards Board (“ FASB”) issued ASU No. 2014-09, “ Revenue from Contracts with Customers .” The ASU will supersede
most of the existing revenue recognition requirements in U.S. GAAP and will require entities to recognize revenue at an amount that reflects the consideration to
which the Company expects to be entitled in exchange for transferring goods or services to a customer. The new standard also requires significantly expanded
disclosures regarding the qualitative and quantitative information of an entity’s nature, amount, timing, and uncertainty of revenue and cash flows arising from
contracts with customers. In August 2015, the FASB issued ASU No. 2015-14, which deferred the effective date by one year to annual reporting periods
beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is permitted, but not before the original effective date of
reporting periods beginning after December 15, 2016. The Company is currently evaluating the impact the pronouncement will have on the consolidated financial
statements and related disclosures.
In January 2015, the FASB issued ASU No. 2015-01, “ Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items .” This ASU
eliminates from U.S. GAAP the concept of extraordinary items and the need for an entity to separately classify, present, and disclose extraordinary events and
transactions, while retaining certain presentation and disclosure guidance for items that are unusual in nature or occur infrequently. The pronouncement is
effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period and may be applied
retrospectively, with early application permitted.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
In April 2015, the FASB issued ASU No. 2015-03, “ Simplifying the Presentation of Debt Issuance Costs .” The accounting guidance requires that debt issuance
costs related to a recognized debt liability be reported on the Consolidated Statements of Financial Condition as a direct deduction from the carrying amount of
that debt liability. The pronouncement is effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting
period with early application permitted for financial statements that have not been previously issued. In August 2015, the FASB issued ASU No. 2015-15, which
provides additional guidance related to the presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements. An entity may
present debt issuance costs as an asset and subsequently amortize the deferred debt issuance costs ratably over the term of the line-of-credit arrangement,
regardless of whether there are any outstanding borrowings.
Reclassification of Prior Year Presentation
Certain prior period amounts have been reclassified to conform to current period presentation. These reclassifications had no effect on the reported results of
operations.
NOTE 3. RELATED PARTIES
The Company has a Related Party Transaction committee including at least two independent directors who review and pre-approve any and all related party
transactions.
On August 6, 2015, the Company acquired a collection route in the state of Louisiana. The President, Chief Executive Officer and owner of which is Dan Cowart,
the brother of our Chief Executive Officer and largest stockholder, Benjamin P. Cowart. The total amount paid to this related party at December 31, 2016 was
$113,576 for rent, equipment rental and transportation.
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 years ended December 31, 2016 and 2015, the Company’s cash balances exceeded the federally
insured limits. No losses have been incurred relating to this concentration.
For the years ended December 31, 2016 and 2015, the Company’s revenues and receivables were comprised of the following customer concentrations:
Customer 1
Customer 2
Customer 3
Customer 4
Customer 5
2016
2015
% of
Revenues
% of
Receivables
% of
Revenues
% of
Receivables
19%
11%
9%
8%
5%
—%
10%
9%
4%
10%
24%
2%
15%
8%
1%
11%
2%
2%
16%
—%
At December 31, 2016 and 2015, and the years then ended, the Company's segment revenues were comprised of the following customer concentrations:
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Customer 1
Customer 2
Customer 3
Customer 4
Customer 5
% of Revenue by Segment 2016
% of Revenue by Segment 2015
Black Oil
Refining
Recovery
Black Oil
Refining
Recovery
100%
100%
100%
—%
—%
—%
—%
—%
100%
—%
—%
—%
—%
—%
100%
100%
100%
60%
—%
—%
—%
—%
40%
100%
—%
—%
—%
—%
—%
100%
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.
New business commitment:
On June 5, 2016, Vertex Energy and Penthol C.V. (“ Penthol”) of the Netherlands aka Penthol LLC (a Penthol subsidiary in the United States) reached an
agreement for Vertex Energy to act as Penthol’s exclusive agent to provide marketing, sales, and logistical duties of Group III base oil from the United Arab
Emirates to the United States. The start-up date was July 25, 2016, with a 5 year term through 2021 and the product will ship via truck, rail and barge.
Litigation:
The Company, in its normal course of business, is involved in various other claims and legal action. In the opinion of management, the outcome of these claims
and actions will not have a material adverse impact upon the financial position of the Company. We are currently party to the following material litigation
proceedings:
Vertex Refining LA, LLC (" Vertex Refining LA"), the wholly-owned subsidiary of Vertex Operating was named as a defendant, along with numerous other parties,
in five lawsuits filed on or about February 12, 2016, in the Second Parish Court for the Parish of Jefferson, State of Louisiana, Case No. 121749, by Russell
Doucet et. al., Case No. 121750, by Kendra Cannon et. al., Case No. 121751, by Lashawn Jones et. al., Case No. 121752, by Joan Strauss et. al. and Case No.
121753, by Donna Allen et. al. The suits relate to alleged noxious and harmful emissions from our facility located in Marrero, Louisiana. The suits seek damages
for physical and emotional injuries, pain and suffering, medical expenses and deprivation of the use and enjoyment of plaintiffs’ homes. We intend to vigorously
defend ourselves and oppose the relief sought in the complaints, provided that at this stage of the litigation, the Company has no basis for determining whether
there is any likelihood of material loss associated with the claims and/or the potential and/or the outcome of the litigation.
E-Source Holdings, LLC ("E-Source"), the wholly-owned subsidiary of Vertex Operating, was named as a defendant (along with Motiva Enterprises, LLC,
("Motiva") in a lawsuit filed in the Sixtieth (60th) Judicial District, Jefferson County, Texas, on April 22, 2015. Pursuant to the lawsuit, Whole Environmental, Inc.
("Whole"), made certain allegations against E-Source and Motiva. The claims include Breach of Contract and Quantum Meruit actions relating to asbestos
abatement and remediation operations performed for defendants at Motiva's facility in Port Arthur, Jefferson County, Texas. The plaintiff alleges it is due monies
earned. Defendants have denied any amounts due to plaintiff. The suit seeks damages of approximately $864,000, along with pre-judgment and post-judgment
interest, the fair value of certain property alleged to be converted by defendants and reimbursement of legal fees. . E-Source has asserted a counterclaim against
Whole for the filing of a mechanic’s lien in excess of any amount(s) actually due as well as a cross-claim against Motiva. Under the terms of E-Source’s contract
with Motiva, Motiva was to pay all sums due to any sub-contractors of E-Source. If any additional monies are owed to Whole, those monies should be paid by
Motiva. E-Source seeks to recover the balance due under its contract with Motiva of approximately $1,000,000. The case is set for trial in the summer of 2017.
We intend to vigorously defend ourselves against the allegations made in the complaint. The Company has no basis of determining whether there is any
likelihood of material loss associated with the claims and/or the potential and/or the outcome of the litigation.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Leases
The Company has various leases for office facilities and vehicles which are classified as operating leases, and which expire at various times through 2032. Total
rent expense for all operating leases for 2016 and 2015 is summarized as follows:
Office leases
Plant Leases
Vehicle leases
2016
2015
$
$
875,320 $
4,052,250
365,877
5,293,447 $
620,219
3,996,000
326,476
4,942,695
Minimum future lease commitments as of December 31, 2016, are summarized as follows:
Year ending December 31,
Office Facilities
Vehicles
Plant Leases
Total
2017
2018
2019
2020
2021
Thereafter
$
466,266 $
391,050
384,500
345,000
342,000
3,275,000
231,084 $
115,665
57,956
—
—
—
3,646,000 $
1,132,000
—
—
—
—
4,343,350
1,638,715
442,456
345,000
342,000
3,275,000
$
5,203,816 $
404,705 $
4,778,000 $
10,386,521
NOTE 5. FIXED ASSETS, NET AND ASSET RETIREMENT OBLIGATIONS
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, 2016 December 31, 2015
$
37,260,920 $
108,896
2,303,156
713,095
6,702,093
12,675,648
2,553,000
62,316,808
(12,286,874)
36,540,268
133,823
2,300,207
591,619
6,422,531
12,305,376
2,553,000
60,846,824
(7,818,217)
$
50,029,934 $
53,028,607
Depreciation expense was $4,502,597 and $4,106,526 for the years ended December 31, 2016 and 2015, respectively.
Equipment under construction in progress is related to TCEP technology improvements, refining equipment at the Marrero and Myrtle Grove facilities in Louisiana.
Asset retirement obligations:
The Company has asset retirement obligations with respect to certain of its refinery assets due to various legal obligations to clean and/or dispose of various
component parts of each refinery at the time they are retired. However, these component parts
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
can be used for extended and indeterminate periods of time as long as they are properly maintained and/or upgraded. It is the Company’s practice and current
intent to maintain its refinery assets and continue making improvements to those assets based on technological advances. As a result, the Company believes that
its refinery assets have indeterminate lives for purposes of estimating asset retirement obligations because dates, or ranges of dates, upon which the Company
would retire refinery assets cannot reasonably be estimated. When a date or range of dates can reasonably be estimated for the retirement of any component
part of a refinery, the Company estimates the cost of performing the retirement activities and records a liability for the fair value of that cost using established
present value techniques.
NOTE 6. GOODWILL
We perform a goodwill impairment analysis at least annually, unless indicators of impairment exist in interim periods. The goodwill impairment assessment is
based on several factors requiring judgment and is based on how our Chief Executive Officer and Chief Financial Officer manage the business. Each of our three
operating segments, Black Oil, Refining and Marketing, and Recovery, constitutes a reportable segment for purposes of reviewing impairment and the
recoverability of goodwill and other intangible assets. We must make various assumptions in determining their estimated fair values regarding estimated future
cash flows and other factors in determining the fair values of the reportable segments. We performed a qualitative assessment (commonly referred to as a "Step
0" test) to determine if it was more likely than not that the fair value of each of our reportable segments with goodwill exceeded their carrying value. In making this
assessment, we evaluated overall business and overall macroeconomic conditions since the date of our last quantitative assessment. We considered in our
qualitative assessment, among other things, expectations of projected revenues and cash flows, trends in market multiples, changes in our stock price, changes
in the carrying values of our reportable segments with goodwill, and overall market conditions. Based on this evaluation, we concluded that our goodwill was likely
impaired and performed a quantitative Step One assessment. A quantitative Step One assessment involves determining the fair value of each reportable
segment using market participant assumptions along with a discounted cash flow approach. As we believe that the carrying value of certain reportable segments
with goodwill did not exceed their estimated fair value, we performed a quantitative Step Two assessment. A quantitative Step Two assessment compares the
carrying value of the reportable segment to the fair value of all of the assets and liabilities of the reportable segment (including any unrecognized intangibles) as if
the reportable segment was acquired in a business combination. If the carrying amount of a reportable segment's goodwill exceeds the implied fair value of its
goodwill, an impairment loss is recognized in an amount equal to the excess.
We recognized a $4,922,353 Goodwill Impairment in 2015, which eliminated the goodwill balance. This result occurred primarily due to the adverse impact of
recently declining oil prices on current and anticipated future oil activity. A t December 31, 2016 and 2015, there was no goodwill recorded. Our Refining and
Marketing segment did not have any goodwill recorded as of December 31, 2016 or 2015.
The following table contains consideration paid in excess of the net assets of the companies acquired, allocated to the respective business segment as of
December 31, 2015:
Balance as of December 31, 2014
Less: Impairment
Balance as of December 31, 2015
Black Oil
Refining and Marketing
Recovery
Total
$
$
3,554,515 $
(3,554,515)
— $
— $
—
— $
1,367,838 $
(1,367,838)
— $
4,922,353
(4,922,353)
—
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
NOTE 7. INTANGIBLE ASSETS, NET
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, 2016
December 31, 2015
Useful Life
(in years)
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Gross
Carrying
Amount
Accumulated
Amortization
5-8
10
6-16
15
3
$
$
1,011,000 $
6,495,049
1,219,000
13,287,000
139,000
22,151,049 $
689,032 $
321,968 $
2,210,166
337,276
3,523,243
139,000
6,898,717 $
4,284,883
881,724
9,763,757
—
15,252,332 $
1,011,000 $
6,495,049
1,219,000
13,287,000
139,000
22,151,049 $
581,321 $
1,560,661
264,639
2,637,443
139,000
5,183,064 $
Net
Carrying
Amount
429,679
4,934,388
954,361
10,649,557
—
16,967,985
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. During 2015, the Company recognized there was no
remaining useful life for the intangible assets related to our E-Source acquisition and we fully amortized these intangibles resulting in additional amortization
expense of $277,450.
Total amortization expense of intangibles was $1,715,653 and $2,032,051 for the years ended December 31, 2016 and 2015, respectively.
Estimated future amortization expense is as follows:
2017
2018
2019
2020
2021
Thereafter
NOTE 8. ACCOUNTS RECEIVABLE AND NOTES RECEIVABLE
Accounts receivable, net, consists of the following at December 31:
Accounts receivable trade
Allowance for doubtful accounts
Accounts receivable trade, net
$
$
1,698,372
1,646,923
1,646,922
1,646,922
1,646,922
6,966,271
15,252,332
2016
2015
$
$
12,598,493 $
(1,646,274)
10,952,219 $
8,280,749
(1,965,335)
6,315,414
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.
F-20
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Notes receivable, net, consists of the following at December 31:
Notes receivable (collateralized by invoiced accounts receivable)
Payments received and amounts written off
Allowance for doubtful accounts
Note receivable (collateralized by invoiced accounts receivable), net
$
$
2016
2015
— $
—
—
— $
5,346,452
(3,654,790)
—
1,691,662
The 2015 notes receivable represents amounts due from Omega Holdings, LLC. The total notes receivable balance of $1,691,662 as of December 31,2015
represents invoiced amounts that do not bear interest as of December 31, 2015.
The remaining portion of the term notes receivable balance $8,308,000 at December 31, 2015 represents amounts due from Omega Holdings, LLC. The
$8,308,000 balance was based on the purchase price allocated to the Nevada facility. The note carried an interest rate of 9.5% per annum and was collateralized
by assets at the Nevada facility. The Company sold the Nevada facility in January, 2016 when the note was satisfied in full.
The accounts receivable and notes receivable balances of $1,691,662 and $8,308,000, respectively, were re-classified as " Assets held for sale" on the Balance
Sheet at December 31, 2015.
NOTE 9. ASSETS HELD FOR SALE
During 2015 the Company reclassified amounts due from Omega Holdings, LLC to the Company based on the portion of the acquisition purchase price that was
allocated to the Bango facility (see "Note 16- Disposition"). The Company sold the Bango facility in January 2016, so the following assets were re-classified as
"Assets held for sale" at December 31, 2015. The Balance of " Assets held for sale" at December 31, 2016 is zero.
Accounts Receivable
Note Receivable - Current
Fixed Assets - Construction in Process
Total Assets held for sale at December 31, 2015
January 2016 sale of assets
Total Assets held for sale at December 31, 2016
December 31, 2015
$
$
1,691,662
8,308,000
1,170,581
11,170,243
(11,170,243)
—
The simultaneous purchase and sale of the Churchill, Nevada facility took place on January 28, 2016.
NOTE 10. LINE OF CREDIT AND LONG-TERM DEBT
In May, 2014, the Company entered into a Credit and Guaranty Agreement with Goldman Sachs Bank USA (as amended, the “ Goldman Credit Agreement ”).
Pursuant to the agreement, Goldman Sachs Bank USA loaned the Company $40,000,000 in the form of a term loan. As set forth in the Goldman Credit
Agreement, the Company has the option to select whether loans made under the Goldman Credit Agreement bear interest at (a) the greater of (i) the prime rate
in effect, (ii) the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System plus ½ of 1%, (iii) the sum
of (A) the Adjusted LIBOR Rate and (B) 1%, and (iv) 4.5% per annum; or (b) the greater of (i) 1.50% and (ii) the applicable ICE Benchmark Administration Limited
interest rate, divided by (x) one minus, (y) the Adjusted LIBOR Rate. Interest on the Goldman Credit Agreement is payable monthly in arrears.
The Goldman Credit Agreement is secured by all of the assets of the Company.
On March 26, 2015, the Company entered into a Second Amendment with Goldman Sachs Bank USA to amend the Goldman Credit Agreement to among other
things, provide for the waiver of the prior defaults and to restructure certain covenants and other financial requirements of the Goldman Credit Agreement and to
allow for our entry into the MidCap Loan Agreement (defined and described below).
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The Goldman Credit Agreement contains customary representations, warranties, and covenants for facilities of similar nature and size as the Goldman Credit
Agreement. The Goldman Credit Agreement also includes various covenants binding the Company including limits on indebtedness the Company may incur and
maintenance of certain financial ratios relating to consolidated EBITDA and debt leverage. As each credit facility contains cross-default provisions, the default
under each lender credit agreement constitutes a default under the agreement with the other lender.
On January 29, 2016, we, Vertex Operating, certain of our other subsidiaries, Goldman Sachs Specialty Lending Holdings, Inc., as lender (“ Lender”) and Goldman
Sachs Bank USA, as Administrative Agent, Lead Arranger and Collateral Agent (“Agent”) entered into an Amended and Restated Credit and Guaranty Agreement
(the “Restated Goldman Credit Agreement ”). The Restated Goldman Credit Agreement changed the Goldman Credit Agreement to an $8.9 million multi-draw
term loan credit facility (of which approximately $6.4 million was outstanding and $2.5 million was available to be drawn pursuant to the terms of the Restated
Goldman Credit Agreement on substantially similar terms as the then outstanding amounts owed to the Lender); modified the Goldman Credit Agreement to
adjust certain EBITDA calculations in connection with the purchase of Bango Oil and the sale of the Bango Plant (each as described in "Note 16. Disposition");
provided for approval for us to exercise the Purchase Option, enter into and effect the transactions contemplated by a Membership Interest Purchase Agreement,
Subscription Agreement, and the Sale Agreement (each as described in "Note 16. Disposition"), and allowed for the issuance of the Fox Note and Open-End
Mortgage, Security Agreement, Fixture Filing and Assignment of Leases and Rents agreement (the "Mortgage") confirmed that we are required to make payments
of $800,000 per quarter from June 30, 2016 through maturity (May 2, 2019); provided us a moratorium on the prepayment of amounts owed under the Restated
Goldman Credit Agreement as a result of various financial ratios we are required to meet through December 31, 2016; provided for us to retain any business
interruption insurance proceeds received in connection with the Bango Plant; provided for us to pay $16 million received at closing from the sale of the Bango
Assets, all amounts released from escrow and any other cash proceeds in excess of $500,000 received from the Sale Agreement after closing to the Lender as
prepayment of amounts due under the Restated Goldman Credit Agreement; allowed us the right to make certain permitted acquisitions moving forward, without
further consent of the Lender, provided that among other requirements, such acquisitions are in the same business or line of business as the Company, that such
acquired businesses have generated consolidated adjusted EBITDA for the four fiscal quarters preceding such acquisition in excess of capital expenditures for
such period (taking into account adjustments acceptable to the Agent for synergies expected to be achieved within the 90 days following the closing of such
acquisition), and that the funding for such acquisition comes from certain limited sources set forth in greater detail in the Restated Goldman Credit Agreement;
adjusted certain fixed charge coverage ratios and leverage ratios we are required to meet on a quarterly basis from September 30, 2016 to maturity; required us
to maintain at least $2 million of liquidity at all times; provided that events of default under the Goldman Credit Agreement include events of default under the Fox
Note; and made various other updates and changes to take into account transactions which had occurred through the date of such agreement, and to remove
expired and non-material terms of the prior Goldman Credit Agreement. The balance under the Goldman Credit Agreement was $4,000,000 at December 31,
2016 and principal payments in the amounts of $3,200,000 and $800,000 are due in 2017 and 2018, respectively. The interest rate at December 31, 2016 was
about 11%. As of December 31, 2016, the Company was in compliance with the terms of the Goldman Credit Agreement. The total balance was paid in full on
February 1, 2017.
Amendment No. 1 to Amended and Restated Credit and Guaranty Agreement
On May 9, 2016, we entered into Amendment No. 1 to the Amended and Restated Goldman Credit Agreement (“ Amendment No. 1 ”), which amended the
Restated Goldman Credit Agreement. Pursuant to Amendment No. 1, we, Vertex Operating, substantially all of our other wholly-owned subsidiaries, the Lender
and the Agent, agreed to amend the Restated Goldman Credit Agreement to (a) change the threshold constituting a change of control under the Restated Credit
Agreement, from any time that Benjamin P. Cowart, our Chief Executive Officer, Chairman and largest stockholder, ceases to beneficially own and control at least
20% on a fully diluted basis of the economic and voting interests of our capital stock (“ Fully-Diluted Capital Stock”), to any time that Mr. Cowart beneficially owns
less than 10% of our Fully-Diluted Capital Stock; (b) extend the date that we are required to meet certain fixed charge coverage ratios from the quarter ending
September 30, 2016, to the quarter ending March 31, 2017; (c) adjust the calculation of leverage ratio described in the Restated Goldman Credit Agreement; (d)
allow for the May 2016 Offering and the required payment of $800,000 to the Lender in connection with the May 2016 Offering (described in " Note 15. Preferred
Stock and Temporary Equity") (representing the payment originally due on June 30, 2016); (e) provide that the financial covenants relating to fixed charge ratios
and leverage ratios would not be tested for the quarters ending September 30, 2016 and December 31, 2016; (f) amend the required timing for certain other post-
closing events to occur under the terms of the Restated Goldman Credit Agreement; and (g) include a release whereby we (and substantially all of our wholly-
owned subsidiaries) released the Investor and Agent for any claims which we had, or could have had, as of the date the parties entered into Amendment No. 1.
Effective March 27, 2015, the Company, Vertex Operating and all of the Company’s other subsidiaries other than E-Source and Golden State entered into a Loan
and Security Agreement with MidCap Business Credit LLC (“MidCap” and the “MidCap Loan Agreement”). Pursuant to the MidCap Loan Agreement, MidCap
agreed to loan us up to the lesser of (i) $7 million; and (ii) 85%
F-22
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
of the amount of accounts receivable due to us which meet certain requirements set forth in the MidCap Loan Agreement (“ Qualified Accounts”), plus the lesser of
(y) $3 million and (z) 50% of the cost or market value, whichever is lower, of our raw material and finished goods which have not yet been sold, subject to the
terms and conditions of the MidCap Loan Agreement (“Eligible Inventory”), minus any amount which MidCap may require from time to time in order to over secure
amounts owed to MidCap under the MidCap Loan Agreement, as long as no event of default has occurred or is continuing under the terms of the MidCap Loan
Agreement. The requirement of MidCap to make loans under the MidCap Loan Agreement is subject to certain standard conditions and requirements.
On November 9, 2015, we and certain of our subsidiaries entered into a First Amendment to Loan and Security Agreement (the “ Midcap First Amendment”). The
Midcap First Amendment amended the Midcap Loan Agreement to add Vertex Refining OH, LLC ("Vertex OH") as a party thereto; remove Vertex OH’s
requirement to enter into a negative pledge agreement with MidCap; created separate maximum borrowing base credit limits for Vertex OH’s accounts and
customers ($100,000 maximum per customer, subject to certain exceptions); excluded customers who are based outside of the U.S. or Canada from the credit
limits if backed by a bank letter of credit or covered by a foreign receivables insurance policy; removed inventory of Vertex OH from the definition of Eligible
Inventory under the Midcap Loan Agreement; and provided that additional affiliates of the Company may become party to the Midcap Loan Agreement by
executing an assumption agreement and revolving note in favor of Midcap. As of December 31, 2016, the balance of the note was $2,726,039. The total balance
was repaid in full on February 1, 2017.
On January 29, 2016, Vertex OH, borrowed $5.15 million from Fox Encore 05 LLC, the prior owner of Bango Oil (" Fox Encore") and provided a Promissory Note
to Fox Encore to reflect such borrowed funds (the “Fox Note”). The Fox Note bears interest at 10% percent per annum (15% upon the occurrence of an event of
default), payable monthly in arrears beginning on February 29, 2016. The principal and all accrued and unpaid interest on the Fox Note was due on the earlier of
(a) July 31, 2016 (as may be extended by Vertex OH as discussed below, the “Maturity Date”), or (b) upon acceleration of the Fox Note during the existence of
an event of default as discussed therein. Provided that no event of default was then existing on the Fox Note or under any other loan document associated
therewith, and certain other requirements as described in the Fox Note are met, Vertex OH had the right to three (3) extension options (each, an “ Extension
Option”) pursuant to which Vertex OH may extend the Maturity Date for six (6) months each. The first extension extends the Maturity Date of the Fox Note until
January 31, 2017 and Vertex OH exercised this Extension Option on June 16, 2016. The second extension could extend the Maturity Date of the Fox Note until
July 31, 2017, and the third extension could extend the Maturity Date of the Fox Note until January 29, 2018. Upon exercising an Extension Option, Vertex OH
was required to pay Fox Encore an extension fee equal to 3% of the then outstanding principal amount of the Fox Note, which amount is separate from, and is not
applied toward, the outstanding indebtedness owed under the Fox Note; provided, however, that if Vertex OH elected to exercise the Extension Option to extend
the Maturity Date to January 31, 2017, the 3% fee for such extension was not to be paid in cash but instead only resulted in the termination of a prepayment
discount described below. The Fox Note could be prepaid in whole or in part at any time without penalty, provided that if repaid in full by July 31, 2016, the
amount to be repaid was to be decreased by $150,000. The Fox Note is secured by the Mortgage described below. The Fox Note includes certain standard and
customary financial reporting requirements, notice requirements, indemnification requirements, covenants and events of default. The Fox Note also includes a
provision allowing the Lender (or any other lender party to the Restated Goldman Credit Agreement) to purchase the Fox Note upon the occurrence of an event
of default under the Restated Goldman Credit Agreement. In July 2016, we exercised the first Extension Option, extending the Maturity Date of the Fox Note to
January 31, 2017. As of December 31, 2016, the balance of the note was $5,150,000. On February 1, 2017, The Fox Note was paid in full.
On January 29, 2016, Vertex OH, entered into an Open-End Mortgage, Security Agreement, Fixture Filing and Assignment of Leases and Rents agreement (the
“Mortgage”) with Fox Encore in order to secure the amount owed under the Fox Note discussed above. Pursuant to the Mortgage, Vertex OH granted Fox Encore
a security interest in the Columbus, Ohio refinery owned by Vertex OH.
The Company has notes payable to Texas Citizens Bank bearing interest at 5.5% per annum, maturing on January 7, 2020. The balance of the notes payable is
$1,531,506 at December 31, 2016.
The Company financed insurance premiums through various financial institutions bearing interest rates from 4% to 4.52%. All such premium finance agreements
have maturities of less than one year and have a balance of $1,060,065 and $515,762 at December 31, 2016 and December 31, 2015, respectively.
On May 2, 2014, in connection with the closing of the Omega Refining acquisition, the Company assumed two capital leases totaling $3,154,860. Payments
made since 2014 have reduced the balance to $133,153 at December 31, 2016.
F-23
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
For the year ended December 31, 2016, we reported interest expense of approximately $3.1 million of which $1.7 million is interest expense on our currently
outstanding debt and the remaining $1.3 million is a one-time write off of the Goldman Sachs deferred finance costs and one-time interest related expenses of
$0.1 million on the Fox Note. The write off of these deferred finance costs was due to the accelerated $16 million payment made on the Goldman Sachs loan as
noted above.
The Company's total line of credit and long term debt as of December 31, 2016 is as follows:
Creditor
Loan Type
Origination Date
Maturity Date
Loan Amount
Balance on
December 31, 2016
Balance on
December 31, 2015
MidCap Revolving Line
of Credit
Goldman Sachs USA
Fox Encore Note
Pacific Western Bank
Texas Citizens Bank
Various institutions
Total
Deferred Finance
Costs, Net
Total, Net of Deferred
Finance Costs
Revolving Note
March, 2015
March, 2017
$
7,000,000 $
2,726,039 $
1,744,122
Term Loan- Restated
Credit Agreement
Promissory Note
Capital Lease
Term Note
Insurance premiums
financed
May, 2014
January 29, 2016
September, 2012
January, 2015
May 2, 2019
July 31, 2017
August, 2017
January, 2020
8,900,000
5,150,000
3,154,860
2,045,500
Various
> 1 year
2,902,428
4,000,000
5,150,000
133,153
1,531,506
1,060,065
14,600,763
22,400,000
—
320,101
1,974,107
515,762
26,954,092
(244,178)
(1,693,872)
$
29,152,788 $
14,356,585 $
25,260,220
Future maturities of notes payable are summarized as follows:
Creditor
2017
2018
2019
2020
2021
Thereafter
MidCap Revolving Line of Credit
$
2,726,039 $
— $
— $
— $
— $
Goldman Sachs USA
Fox Encore Note
Pacific Western Bank
Texas Citizens Bank
Various institutions
3,200,000
5,150,000
133,153
468,225
1,060,065
800,000
—
—
495,013
—
Totals
Deferred Finance Costs, Net
12,737,482
(229,008)
1,295,013
(7,585)
—
—
—
523,333
—
523,333
(7,585)
—
—
—
44,935
—
44,935
—
—
—
—
—
—
—
—
Total, Net of Deferred Finance Costs
$
12,508,474 $
1,287,428 $
515,748 $
44,935 $
— $
—
—
—
—
—
—
—
—
—
NOTE 11. INCOME TAXES
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 rate of 34% to pretax income from continuing operations as a result of the following for the years ended
December 31, 2016 and 2015:
F-24
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Statutory tax on book income
Permanent differences
Net operating loss utilization
Change in valuation allowance
Other
Income tax expense (benefit)
December 31, 2016
December 31, 2015
$
$
(1,344,000) $
32,000
—
(9,306,753)
10,501,107
(117,646) $
(7,656,000)
33,000
—
13,114,000
(185,000)
5,306,000
The components of income tax (benefit) expense for the years ended December 31, 2016 and 2015 are as follows:
Current federal tax (expense)/benefit
Deferred federal tax (expense)/benefit
Total federal tax (expense)/benefit
December 31, 2016
December 31, 2015
$
$
117,646 $
—
117,646 $
—
(5,306,000)
(5,306,000)
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, 2016
and 2015 are presented below:
Deferred tax assets:
Alternative minimum tax credits
Accrued compensation
Intangible Assets
Bad debt reserve
Contribution carryover
Net operating loss carry forwards
Less valuation allowance
Total deferred tax assets
Deferred tax liabilities:
Gain on purchase
Contingent liability
Accelerated tax depreciation
Impairment Expense
Other - income from partnership
Net deferred tax liabilities
Net Deferred tax assets and liabilities
December 31, 2016
December 31, 2015
— $
464,000
1,990,000
560,000
67,000
15,009,000
(14,814,000)
3,276,000 $
—
393,000
232,000
668,000
51,000
24,150,000
(24,120,753)
1,373,247
December 31, 2016
December 31, 2015
— $
—
(3,276,000)
—
—
(108,247)
—
(1,265,000)
—
—
(3,276,000) $
(1,373,247)
— $
—
$
$
$
$
$
The Company has determined that a valuation allowance of approximately $14,814,000 is necessary at December 31, 2016 to reduce the deferred tax assets to
the amount that will more than likely not be realized.
The Company is subject to examination by Federal and State tax authorities for fiscal years 2013 through 2016.
A t December 31, 2016, the Company had federal net operating loss carry-forwards (" NOLs") of approximately $44.1 million acquired as part of the Merger
between World Waste and the Company's wholly-owned subsidiary Vertex Merger Sub, LLC and
F-25
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
subsequent operating losses incurred by the Company. 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. The net operating loss
carryforward will begin to expire in 2026. Certain tax attributes are subject to an annual limitation as a result of an ownership change triggering event on May 2016
as defined under Internal Revenue Code Section 382.
NOTE 12. STOCK BASED COMPENSATION
The stock based compensation cost that has been charged against income by the Company was $527,869 and $423,910 for the years ended December 31,
2016 and 2015, respectively, for options previously awarded by the Company.
Stock option activity for the years ended December 31, 2016 and 2015 are summarized as follows:
OPTIONS ISSUED FOR COMPENSATION:
Shares
Weighted Average Exercise
Price
Weighted Average
Remaining Contractual Life
(in Years)
Grant Date
Fair Value
Outstanding at December 31, 2014
Options granted
Options exercised
Options cancelled/forfeited/expired
Outstanding at December 31, 2015
Vested at December 31, 2015
Exercisable at December 31, 2015
Outstanding at December 31, 2015
Options granted
Options exercised
Options cancelled/forfeited/expired
Outstanding at December 31, 2016
Vested at December 31, 2016
Exercisable at December 31, 2016
2,648,583 $
525,000
(25,000)
(275,001)
2,873,582 $
1,881,395 $
1,881,395 $
2,873,582 $
570,000
(100,000)
(136,666)
3,206,916 $
2,044,104 $
2,044,104 $
7.07
2.23
(0.45)
(20.22)
4.99
5.70
5.70
4.99
1.38
(0.50)
(8.64)
4.33
4.05
4.05
5.81 $
9.71
0.00
0.00
5.94 $
4.55 $
4.55 $
5.94 $
9.72
0.00
0.00
5.80 $
4.29 $
4.29 $
1,654,641
1,083,411
(9,000)
(143,711)
2,585,341
372,367
372,367
2,585,341
622,115
(27,753)
(213,675)
2,966,028
1,295,727
1,295,727
On February 5, 2016, the Board of Directors granted an employee options to purchase an aggregate of 100,000 shares of common stock at an exercise price of
$1.73 per share, with a ten year term (subject to continued employment/directorship), vesting at the rate of 1/4th of such options per year on the first four
anniversaries of the grant, under our 2013 Stock Incentive Plan, as amended, in consideration for services rendered and to be rendered to the Company.
On June 6, 2016, the Board of Directors granted 10 employees options to purchase an aggregate of 170,000 shares of common stock at an exercise price of
$1.39 per share, with a ten year term (subject to continued employment/directorship), vesting at the rate of 1/4th of such options per year on the first four
anniversaries of the grant, under our 2013 Stock Incentive Plan, as amended, in consideration for services rendered and to be rendered to the Company.
F-26
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
A summary of the Company’s stock warrant activity and related information for the years ended December 31, 2016 and 2015 is as follows:
WARRANTS ISSUED FOR COMPENSATION AND
OTHER THAN SERIES B AND B1 PREFERRED
STOCK:
Shares
Weighted Average Exercise
Price
Weighted Average
Remaining Contractual Life
(in Years)
Grant Date
Fair Value
Outstanding at December 31, 2014
Warrants granted
Warrants exercised
Warrants canceled/forfeited/expired
Warrants at December 31, 2015
Vested at December 31, 2015
Exercisable at December 31, 2015
Outstanding at December 31, 2015
Warrants granted
Warrants exercised
Warrants canceled/forfeited/expired
Warrants at December 31, 2016
Vested at December 31, 2016
Exercisable at December 31, 2016
219,868 $
— $
—
—
219,868 $
219,868 $
219,868 $
219,868 $
— $
—
—
219,868 $
219,868 $
219,868 $
3.01
—
—
—
3.01
3.01
3.01
3.01
—
—
—
3.01
3.01
3.01
5.00 $
— $
—
—
4.00 $
4.00 $
4.00 $
4.00 $
— $
—
—
3.00 $
3.00 $
3.00 $
140,249
—
—
—
140,249
140,149
140,149
140,249
—
—
—
140,249
140,149
140,149
See "Note 15. Preferred Stock and Temporary Equity " for a description of the warrants that were granted in conjunction with our Series B and B1 Preferred stock.
The following table summarizes the assumptions used in assessing the above described option and warrant valuations:
Expected volatility
Expected dividends
Expected term (in years)
Risk-free rate
NOTE 13. EARNINGS PER SHARE
YEAR ENDED DECEMBER 31,
2016
YEAR ENDED DECEMBER 31,
2015
78-79%
—%
0
.91-1.57%
29-69%
—%
10
.96-1.06%
Basic earnings per share includes no dilution and is computed by dividing income (loss) 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, 2016 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, 2016
does not include options to purchase 3,063,852 shares and warrants to purchase 4,252,135 shares due to their anti-dilutive effect. In the event the Preferred B
and B1 were to convert, 3,229,409 and 12,285,875 shares, respectively, of common stock would be issuable at December 31, 2016.
F-27
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The following is a reconciliation of the numerator and denominator for basic and diluted earnings per share for the years ended December 31, 2016 and 2015:
Basic Earnings per Share
Numerator:
Net income (loss) available to common shareholders
Denominator:
Weighted-average common shares outstanding
Basic earnings per share
Diluted Earnings per Share
Numerator:
2016
2015
$
$
(15,537,395) $
(24,102,700)
30,520,820
28,181,096
(0.51) $
(0.86)
Net income (loss) available to common shareholders
$
(15,537,395) $
(24,102,700)
Denominator:
Weighted-average shares outstanding
Effect of dilutive securities
Stock options and warrants
Preferred stock
Diluted weighted-average shares outstanding
Diluted earnings (loss) per share
NOTE 14. COMMON STOCK
30,520,820
28,181,096
—
—
—
—
30,520,820
28,181,096
$
(0.51) $
(0.86)
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, 2016, there
were 33,151,391 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.
On January 21, 2016, the Company issued 244,000 shares of common stock to pay the January 2016 rent due pursuant to the terms of our lease on our Fallon,
Nevada plant.
On January 29, 2016, the Company issued 1,108,928 shares of common stock as part of the escrow fulfillment of the sale of the Vertex Refining Nevada assets
to Safety-Kleen Systems, Inc. (the "Bango Sale").
On February 4, 2016, the Company issued 53,271 shares of common stock in connection with a former employee's cashless exercise of stock options to
purchase 100,000 shares of common stock.
On February 5, 2016, the Company issued 120,227 shares of common stock in connection with the conversion of an equal amount of Series A Preferred shares
into common stock.
On August 2, 2016, the Company issued 1,243,200 shares of common stock in connection with the conversion of 12,432 shares of Series C Preferred stock at
par value of $0.001.
On October 31, 2016, a holder of our Series B1 Convertible Preferred Stock converted 403,217 shares of our Series B1 Convertible Preferred Stock into 403,217
shares of our common stock at par value of $0.001.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
On November 2, 2016, a holder of our Series B Convertible Preferred Stock converted 1,739,272 shares of our Series B Convertible Preferred Stock into
1,739,272 shares of our common stock at par value of $0.001.
On April 5, 2015, the Company issued 56,180 shares of the Company's restricted common stock at par value of $0.001 in connection with the inventory true up
stipulated in the Heartland purchase agreement.
On December 13, 2016, the Board of Directors granted our non-executive directors options to purchase an aggregate of 300,000 shares of common stock at an
exercise price of $1.26 per share (60,000 options per non-executive director), with a ten year term (subject to continued employment/directorship), vesting at the
rate of 1/4th of such options per year on the first four anniversaries of the grant, under our 2013 Stock Incentive Plan, as amended, in consideration for services
rendered and to be rendered to the Company.
During the three months ended March 31, 2015, the Company recognized contingently issuable warrants to purchase 1,766,874 shares of our common stock in
connection with the amendments to the Credit Agreement with Goldman Sachs Bank USA. Due to the down round feature of the warrant, the Company used the
Black-Scholes model to value these warrants and has concluded that these are level 3 inputs. Management determined a discount factor on the grant date and on
the balance sheet date based on available projections of cash to be used to make the mandatory repayments which resulted in a fair value derivative liability for
the warrants of $577,440 at March 31, 2015. Effective June 29, 2015, we repaid $15.1 million of the amount owed to the lender and as a result, the lender
warrants and rights were canceled and terminated.
Effective on June 24, 2015, the Compensation Committee of the Board of Directors (the “ Committee”) granted Chris Carlson, our Chief Financial Officer, options
to purchase 75,000 shares of our common stock with an exercise price of $3.15 per share, with a ten year term, vesting at the rate of 1/4th of such options per
year on the first four anniversaries of the grant, under our 2013 Stock Incentive Plan. The balance sheet fair value at the date of the grant was $90,462.
On July 7, 2015, the Board of Directors granted (a) our non-executive directors options to purchase an aggregate of 300,000 shares of common stock at an
exercise price of $2.08 per share (60,000 options per non-executive director); and (b) certain of our non-executive officers, options to purchase an aggregate of
150,000 shares of common stock at an exercise price of $2.08 per share (50,000 shares per executive officer), with a ten year term (subject to continued
employment/directorship), vesting at the rate of 1/4th of such options per year on the first four anniversaries of the grant, under our 2013 Stock Incentive Plan in
consideration for services rendered and to be rendered to the Company. On September 30, 2015, one of the non-executive officers resigned from the Company,
terminating the 50,000 options granted to this individual which were unvested. The balance sheet fair value at the date of the grant was $478,200.
In August 2015, a holder of our Series B Preferred Stock fully converted all 32,260 of the shares of Series B Preferred Stock which it then held into shares of our
common stock on a one-for-one basis. The shares of common stock issuable in connection with such conversion were previously registered by us on a Form S-1
Registration Statement. Additionally, the same holder converted an aggregate of approximately $791 in accrued dividends on such converted Series B Preferred
Stock shares into 255 shares of common stock ($3.10 per share of common stock), which shares of common stock were also previously registered by us on a
Form S-1 Registration Statement.
During the year ending December 31, 2015, 17,476 shares of the Company's Series A Preferred Stock were converted into 17,476 shares of our common stock
on a one-for-one basis. Additionally, options to purchase 25,000 shares of common stock were exercised for 25,000 shares of common stock in consideration for
an aggregate exercise price of $11,250 in connection with such exercise.
NOTE 15. PREFERRED STOCK AND TEMPORARY EQUITY
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 10,000,000. The total number of designated shares of the Company’s Series B1 Preferred Stock is 17,000,000. The total number of
designated shares of the Company's Series C Preferred Stock is 44,000. As of December 31, 2016 and December 31, 2015, there were 492,716 shares and
612,943 shares of Series A Preferred Stock issued and outstanding, respectively. As of December 31, 2016 and December 31, 2015, there were 3,229,409 and
8,160,809 Series B Preferred shares issued and outstanding, respectively. In connection with the May 2016 Purchase Agreement described below under " Series
B1 Preferred Stock and Temporary Equity", 3,575,070 shares of Series B Preferred Stock were repurchased and retired. As of December 31, 2016 and December
31, 2015, there were 12,282,638 and 0 shares of Series B1
F-29
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Preferred Stock issued and outstanding, respectively. As of December 31, 2016 and December 31, 2015 there were 31,568 and 0 shares of Series C Preferred
Stock issued and outstanding, respectively. The 31,568 shares of Series C Preferred Stock would convert into 3,156,800 shares of Common Stock.
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 and Temporary Equity
Dividends on our Series B Preferred Stock accrue at an annual rate of 6% of the original issue price of the preferred stock ($3.10 per share), subject to increase
under certain circumstances, and are payable on a quarterly basis. The dividends are payable by the Company, at the Company’s election, in registered common
stock of the Company (if available) or cash. In the event dividends are paid in registered common stock of the Company, the number of shares payable will be
calculated by dividing (a) the accrued dividend by (b) 90% of the arithmetic average of the volume weighted average price (VWAP) of the Company’s common
stock for the 10 trading days immediately prior to the applicable date of determination (the “ June 2015 Dividend Stock Payment Price ”). Notwithstanding the
foregoing, in no event may the Company pay dividends in common stock unless the applicable June 2015 Dividend Stock Payment Price is above $2.91. If the
Company is prohibited from paying or chooses not to pay, the dividend in cash (due to contractual senior credit agreements or other restrictions) or is unable to
pay the dividend in registered common stock, the dividend can be paid in kind in Series B Preferred Stock shares at $3.10 per share.
The Series B Preferred Stock includes a liquidation preference (in the amount of $3.10 per share) which is junior to the Company’s previously outstanding shares
of preferred stock, senior credit facilities and other debt holders as provided in further detail in the designation and senior to the Series C Preferred Stock and pari
passu with the Series B1 Preferred Stock.
The Series B Preferred Stock (including accrued and unpaid dividends) is convertible into shares of the Company’s common stock at the holder’s option at $3.10
per share (initially a one-for-one basis). If the Company’s common stock trades at or above $6.20 per share for a period of 20 consecutive trading days, the
Company may at such time force conversion of the Series B Preferred Stock (including accrued and unpaid dividends) into common stock of the Company.
The Series B Preferred Stock votes together with the common stock on an as-converted basis, provided that each holder’s voting rights are subject to and limited
by the Series B Beneficial Ownership Limitation described below.
F-30
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The Company has the option to redeem the outstanding shares of Series B Preferred Stock at $3.10 per share, plus any accrued and unpaid dividends on such
Series B Preferred Stock redeemed, at any time beginning on June 24, 2017, and the Company is required to redeem the Series B Preferred Stock at $3.10 per
share, plus any accrued and unpaid dividends, on June 24, 2020. Notwithstanding either of the foregoing, the Series B Preferred Stock may not be redeemed
unless and until amounts outstanding under the Company’s senior credit facility have been paid in full, which has occurred to date.
The Series B Preferred Stock contains a provision prohibiting the conversion of such Series B Preferred Stock into common stock of the Company, if upon such
conversion, the holder thereof would beneficially own more than 9.999% of the Company’s then outstanding common stock (the “Series B Beneficial Ownership
Limitation”). The Series B Beneficial Ownership Limitation does not apply to forced conversions undertaken by the Company pursuant to the terms of the
designation (summarized above).
On June 24, 2015, we closed the transactions contemplated by the June 19, 2015 Unit Purchase Agreement (the “ June 2015 Purchase Agreement”) we entered
into with certain institutional investors (the “June 2015 Investors ”), pursuant to which the Company sold the June 2015 Investors an aggregate of 8,064,534 units
(the “ June 2015 Units”), each consisting of (i) one share of Series B Preferred Stock and (ii) one warrant to purchase one-half of a share of common stock of the
Company (each a “June 2015 Warrant ” and collectively, the “June 2015 Warrants ”). The June 2015 Units were sold at a price of $3.10 per June 2015 Unit (the
“June 2015 Unit Price ”) (a 6.1% premium to the closing bid price of the Company’s common stock on the NASDAQ Capital Market on the date the June 2015
Purchase Agreement was entered into which was $2.91 per share (the “June 2015 Closing Bid Price”)). The June 2015 Warrants have an exercise price
o f $2.92 per share ($0.01 above the June 2015 Closing Bid Price). Total gross proceeds from the offering of the June 2015 Units (the “ June 2015 Offering”)
were $25.0 million.
The Placement Agent received a commission equal to 6.5% of the gross proceeds (less $4.0 million raised from certain investors in the June 2015 Offering for
which they will receive no fee) from the June 2015 Offering, for an aggregate commission of $1.365 million which was netted against the proceeds.
We used the net proceeds from the June 2015 Offering to repay amounts owed under the Goldman Credit Agreement in the amount of $15.1 million.
In addition, under the June 2015 Purchase Agreement, the Company agreed to register the shares of common stock issuable upon conversion of the Series B
Preferred Stock and upon exercise of the June 2015 Warrants under the Securities Act of 1933, as amended, for resale by the June 2015 Investors. The
Company committed to file a registration statement on Form S-1 by the 30th day following the closing of the June 2015 Offering (which filing date was met) and
to cause the registration statement to become effective by the 90th day following the closing (or, in the event of a “full review” by the Securities and Exchange
Commission, the 120th day following the closing), which registration statement was declared effective by the Securities and Exchange Commission on August 6,
2015. The June 2015 Purchase Agreement provides for liquidated damages upon the occurrence of certain events, including, but not limited to, the failure by the
Company to cause the registration statement to become effective by the deadlines set forth above. The amount of the liquidated damages is 1.0% of the
aggregate subscription amount paid by a June 2015 Investor for the June 2015 Units affected by the event that are still held by the Investor upon the occurrence
of the event, due on the date immediately following the event that caused such failure (or the 30th day following such event if the event relates to the suspension
of the registration statement as described in the June 2015 Purchase Agreement), and each 30 days thereafter, with such payments to be prorated on a daily
basis during each 30 day period, subject to a maximum of an aggregate of 6% per annum.
Under the June 2015 Purchase Agreement, the Company agreed to indemnify the June 2015 Investors for liabilities arising out of or relating to (i) any untrue
statement of a material fact contained in the registration statement, (ii) any inaccuracy in the representations and warranties of the Company contained in the
June 2015 Purchase Agreement or the failure of the Company to perform its obligations under the June 2015 Purchase Agreement and (iii) any failure by the
Company to fulfill any undertaking included in the registration statement, subject to certain exceptions. The Investors, severally, and not jointly agreed to
indemnify the Company against (i) any failure by such Investor to comply with the covenants and agreements contained in the June 2015 Purchase Agreement
and (ii) any untrue statement of a material fact contained in the registration statement to the extent such untrue statement was made in reliance upon and in
conformity with written information furnished by or on behalf of that Investor specifically for use in preparation of the registration statement, subject to certain
exceptions.
The Company agreed pursuant to the June 2015 Purchase Agreement, that until 60 days following effectiveness of the registration statement filed, to register the
shares of common stock underlying the Series B Preferred Stock and June 2015 Warrants (the “June 2015 Lock-Up Period”), to not offer or sell any common
stock or securities convertible or exercisable into common stock, except pursuant to certain exceptions described in the June 2015 Purchase Agreement, and
each of the Company’s officers and directors
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
agreed to not sell or offer for sale any shares of common stock until the end of the June 2015 Lock-Up Period, subject to certain exceptions.
The June 2015 Warrants were valued using the dynamic Black Scholes Merton formula pricing model that computes the impact of share dilution upon the
exercise of the warrant shares at approximately $7,028,067. The Black-Scholes inputs used were: expected dividend rate of 0%, expected volatility of 70%, risk
free interest rate of 1.59%, and expected term of 5.5 years. This valuation resulted in a beneficial conversion feature on the convertible preferred stock of
approximately $5,682,741. This amount, includes the entire discount-warrants and BCF, will be accreted over the term as a deemed dividend. Fees in the
amount of $1.4 million relating to the stock placement were netted against proceeds. The warrants are exercisable beginning on December 26, 2015, and expire
December 24, 2020.
In connection with the May 2016 Purchase Agreement described below under " Series B1 Preferred Stock and Temporary Equity ", certain funds received in that
offering totaling $11,189,838 were used to immediately repurchase and retire 3,575,070 shares of Series B Preferred Stock and pay the accrued but unpaid
dividends due thereon and on certain other shares of Series B Preferred Stock held by those holders (the “Repurchases”). In connection with this transaction,
$5,408,131 of unaccreted discount on these 3,575,070 shares of Series B Preferred Stock which were retired, was immediately recognized in dividends, which
represents the pro-rata portion of the unaccreted discount.
The following table represents the carrying amount of the Series B Preferred Stock, classified as Temporary Equity on the Balance Sheet, at inception and as of
December 31, 2016 and December 31, 2015:
Temporary Equity:
At Inception
Face amount of Series B Preferred
Less: warrant value
Less: beneficial conversion feature
Less: issuance costs and fees
Carrying amount at inception
Face amount of Series B Preferred
Less: repurchase of 3,575,070 shares
Less: conversion of 1,739,272 shares to common stock
Plus: dividend in kind
Less: un-accreted discount
Carrying amount
June 24, 2015
25,000,000
7,028,067
5,737,796
1,442,462
10,791,675
December 31, 2016
December 31, 2015
25,000,000 $
11,189,838
5,386,341
1,164,701
6,256,604
3,331,918 $
25,000,000
—
—
—
13,044,793
11,955,207
$
$
$
$
In accordance with ASC 815-40-25 and ASC 815-10-15 Derivatives and Hedging and ASC 480-10-25 Liabilities-Distinguishing Liabilities from Equity as approved
by shareholders, the convertible preferred shares are accounted for net outside of stockholders’ equity at $3,331,918 with the June 2015 Warrants accounted for
as liabilities at their fair value of $1,952,565 and $1,548,604 as of December 31, 2016 and 2015, respectively. The value of the derivative warrant liability will be
re-measured at each reporting period with changes in fair value recorded as earnings. To derive an estimate of the fair value of the June 2015 Warrants, the
Company utilized a dynamic Black Scholes Merton formula that computes the impact of share dilution upon the exercise of the warrant shares. This process
relies upon inputs such as shares outstanding, estimated stock prices, strike price and volatility assumptions to dynamically adjust the payoff of the June 2015
Warrants in the presence of the dilution effect. In the event the convertible preferred shares are redeemed, any redemption price in excess of the carrying amount
of the convertible preferred stock would be treated as a dividend.
F-32
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The changes in liabilities measured using significant unobservable inputs for the period ended December 31, 2016 were as follows:
Level Three Roll-Forward
Item
Balance at December 31, 2014
Warrants issued June 24, 2015
Change in valuation of warrants
Balance at December 31, 2015
May 2016 Series B1 Preferred Warrants (described below)
Change in valuation of warrants
Balance at December 31, 2016
Level 3
$
$
—
7,028,067
(5,479,463)
1,548,604
2,867,264
(49,876)
4,365,992
The warrants related to the June 2015 Series B Preferred Stock and the May 2016 Series B1 Preferred Stock were revalued during the year ended December 31,
2016 using the Dynamic Black Scholes model that computes the impact of a possible change in control transaction upon the exercise of the warrant shares at
approximately $(49,876). At December 31, 2016, the June 2015 Warrants and the May 2016 Warrants were valued at approximately $1,952,565 and $2,413,427,
respectively. The dynamic Black-Scholes inputs used were: expected dividend rate of 0%, expected volatility of 78%-100%, risk free interest rate of 1.59% to
1.76%, and expected term of 4.54 years (June 2015 Warrants) and 5.11 years (May 2016 Warrants).
The Certificate of Designation contains customary anti-dilution protection for proportional adjustments (e.g. stock splits).
The beneficial conversion feature (BCF) relates to potential difference between the effective conversion price (measured based on proceeds allocated to the
Series B Preferred Stock) and the fair value of the stock into which Preferred B Shares are currently convertible (common stock).
If a conversion option embedded in a debt host instrument does not require separate accounting as a derivative instrument under ASC 815, the convertible hybrid
instrument must be evaluated under ASC 470-20 for the identification of a possible BCF.
The BCF will be initially recognized as an offsetting reduction to Series B Preferred Stock (debit) - Temporary Equity, with the credit being recognized in equity
(additional paid-in capital).
The resulting debt issuance costs, debt discount, value allocated to warrants, and BCF should be accreted to the Series B Preferred Stock to ensure that the
Series B Preferred Stock balance is equal to its face value as of the redemption or conversion date, if conversion is expected earlier.
The BCF in June 24, 2015 was determined by calculating the intrinsic value of the conversion feature as follows:
Face amount of Series B Preferred Stock
Less: allocated value of Warrants
Allocated value of Series B Preferred Stock
Shares of Common stock to be converted
Effective conversion price
Market price
Intrinsic value per share
Intrinsic value of beneficial conversion feature
$
$
$
$
$
$
25,000,000
7,028,067
17,971,933
8,064,534
2.23
2.94
0.7115
5,737,796
As of December 31, 2016 and December 31, 2015, a total of $214,227 and $376,571, respectively, of dividends accrued on our outstanding Series B Preferred
Stock (not including shares of Series B Preferred Stock converted into common stock in August
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
2015, as described above). We were prohibited from paying such dividends in shares of common stock because the applicable June 2015 Dividend Stock
Payment Price was below $2.91. The “June 2015 Dividend Stock Payment Price ” is calculated by dividing (a) the accrued dividends by (b) 90% of the arithmetic
average of the volume weighted average price (VWAP) of the Company’s common stock for the 10 trading days immediately prior to the applicable date of
determination. In the event the applicable June 2015 Dividend Stock Payment Price is below $2.91 we are required to pay such dividend in cash or in-kind in
additional shares of Series B Preferred Stock. Pursuant to the terms of our Goldman Credit Agreement, we were prohibited from paying the dividend in cash and
therefore we paid the accrued dividends in-kind for the year ending December 31, 2016 by way of the issuance of restricted shares of Series B Preferred Stock
pro-rata to each of the then holders of our Series B Preferred Stock totaling 263,087 during the year. If converted in full, these dividends issued in kind would
convert on a one-for-one basis into shares of our common stock.
On November 2, 2016, a holder of our Series B Convertible Preferred Stock converted 1,739,272 shares of our Series B Convertible Preferred Stock into
1,739,272 shares of our common stock. A total of $946,805 was recognized as a dividend to retained earnings.
Series B1 Preferred Stock and Temporary Equity
Dividends on our Series B1 Preferred Stock accrue at an annual rate of 6% of the original issue price of the preferred stock ($1.56 per share), subject to
increases under certain circumstances, and are payable on a quarterly basis. The dividends are payable by the Company, at the Company’s election, in
registered common stock of the Company (if available) or cash. In the event dividends are paid in registered common stock of the Company, the number of
shares payable will be calculated by dividing (a) the accrued dividend by (b) 90% of the arithmetic average of the volume weighted average price (VWAP) of the
Company’s common stock for the 10 trading days immediately prior to the applicable date of determination (the “ May 2016 Dividend Stock Payment Price ”).
Notwithstanding the foregoing, in no event may the Company pay dividends in common stock unless the applicable May 2016 Dividend Stock Payment Price is
above $1.52. If the Company is prohibited from paying, or chooses not to pay, the dividend in cash (due to contractual senior credit agreements or other
restrictions) or is unable to pay the dividend in registered common stock, the dividend can be paid in kind in Series B1 Preferred Stock shares at $1.56 per
share.
The Series B1 Preferred Stock include a liquidation preference (in the amount of $1.56 per share) which is junior to the Company’s previously outstanding shares
of preferred stock, except the Series B Preferred Stock, which it is pari passu with, senior credit facilities and other debt holders as provided in further detail in the
designation and senior to the Series C Preferred Stock.
The Series B1 Preferred Stock (including accrued and unpaid dividends) is convertible into shares of the Company’s common stock at the holder’s option at $1.56
per share (initially a one-for-one basis). If the Company’s common stock trades at or above $3.90 per share for a period of 20 consecutive trading days, after
certain triggering events occur, the Company may at such time force conversion of the Series B1 Preferred Stock (including accrued and unpaid dividends) into
common stock of the Company.
The Series B1 Preferred Stock votes together with the common stock on an as-converted basis, provided that each holder’s voting rights are subject to and
limited by the Series B1 Beneficial Ownership Limitation described below.
The Company has the option to redeem the outstanding shares of Series B1 Preferred Stock at $1.72 per share, plus any accrued and unpaid dividends on such
Series B1 Preferred Stock redeemed, at any time beginning on June 24, 2017, and the Company is required to redeem the Series B Preferred Stock at $1.56 per
share, plus any accrued and unpaid dividends, on June 24, 2020. Notwithstanding either of the foregoing, the Series B1 Preferred Stock may not be redeemed
unless and until amounts outstanding under the Company’s senior credit facility have been paid in full.
The Series B1 Preferred Stock and May 2016 Warrants (defined below) contain provisions prohibiting the conversion of such Series B1 Preferred Stock into
common stock of the Company, if upon such conversion, the holder thereof would beneficially own more than 9.999% (4.999% for certain holders) of the
Company’s then outstanding common stock (the “Series B1 Beneficial Ownership Limitation”). The Series B1 Beneficial Ownership Limitation does not apply to
forced conversions undertaken by the Company pursuant to the terms of the Designation (summarized above).
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
On May 10, 2016, we entered into a Unit Purchase Agreement (the “ May 2016 Purchase Agreement”) with certain institutional investors (the “ May 2016
Investors”), pursuant to which, on May 13, 2016, the Company sold the May 2016 Investors an aggregate of 12,403,683 units (the "May 2016 Units”), each
consisting of (i) one share of Series B1 Preferred Stock and (ii) one warrant to purchase one-quarter of a share of common stock of the Company (each a “ May
2016 Warrant” and collectively, the " May 2016 Warrants”). The Units were sold at a price of $1.56 per Unit (the “May 2016 Unit Price ”) (a 2.6% premium to the
closing bid price of the Company’s common stock on the NASDAQ Capital Market on the date the May 2016 Purchase Agreement was entered into which was
$1.52 per share (the “May 2016 Closing Bid Price”)). The May 2016 Warrants have an exercise price of $1.53 per share ($0.01 above the May 2016 Closing Bid
Price). Total gross proceeds from the offering of the Units (the “May 2016 Offering”) were $19.4 million.
A total of $18,649,738 of the securities sold in the May 2016 Offering were purchased by investors who participated in the Company’s prior June 2015 offering of
Series B Preferred Stock and warrants to purchase shares of common stock. A total of 60% of the funds received from such investors were used to immediately
repurchase such investors’ Series B Preferred Stock. As a result, a total of $11,189,838 of the proceeds raised in the May 2016 Offering were used to
immediately repurchase and retire 3,575,070 shares of Series B Preferred Stock (the “ Repurchases”). Leaving net proceeds of approximately $8.1 million, before
deducting placement agents’ fees and estimated offering expenses.
The Placement Agent in the offering received a commission equal to 6.5% of the net proceeds from the May 2016 Offering, after affecting the Repurchases
described above, for an aggregate commission of $0.53 million which was netted against the proceeds raised.
We used the net proceeds from the May 2016 Offering to repay amounts owed under the Credit Agreement in the amount of $0.8 million and the remaining
proceeds were used for working capital purposes and potential acquisitions.
In addition, under the May 2016 Purchase Agreement, the Company agreed to register the shares of common stock issuable upon conversion of the Series B1
Preferred Stock and upon exercise of the May 2016 Warrants under the Securities Act of 1933, as amended, for resale by the May 2016 Investors. The Company
committed to file a registration statement on Form S-1 by the 30th day following the closing of the May 2016 Offering (which filing date was met) and to cause the
registration statement to become effective by the 90th day following the closing (or, in the event of a “full review” by the Securities and Exchange Commission,
the 120th day following the closing), which registration statement was declared effective by the SEC on August 10, 2016. The May 2016 Purchase Agreement
provides for liquidated damages upon the occurrence of certain events, including, but not limited to, the failure by the Company to cause the registration
statement to become effective by the deadlines set forth above. The amount of the liquidated damages is 1.0% of the aggregate subscription amount paid by a
May 2016 Investor for the May 2016 Units affected by the event that are still held by the May 2016 Investor upon the occurrence of the event, due on the date
immediately following the event that caused such failure (or the 30th day following such event if the event relates to the suspension of the registration statement
as described in the May 2016 Purchase Agreement), and each 30 days thereafter, with such payments to be prorated on a daily basis during each 30 day period,
subject to a maximum of an aggregate of 6% per annum.
Under the May 2016 Purchase Agreement, the Company agreed to indemnify the May 2016 Investors for liabilities arising out of or relating to (i) any untrue
statement of a material fact contained in the registration statement, (ii) any inaccuracy in the representations and warranties of the Company contained in the
May 2016 Purchase Agreement or the failure of the Company to perform its obligations under the May 2016 Purchase Agreement and (iii) any failure by the
Company to fulfill any undertaking included in the registration statement, subject to certain exceptions. The Investors, severally, and not jointly agreed to
indemnify the Company against (i) any failure by such Investor to comply with the covenants and agreements contained in the May 2016 Purchase Agreement
and (ii) any untrue statement of a material fact contained in the registration statement to the extent such untrue statement was made in reliance upon and in
conformity with written information furnished by or on behalf of that Investor specifically for use in preparation of the registration statement, subject to certain
exceptions.
The Company agreed pursuant to the May 2016 Purchase Agreement, that until 60 days following effectiveness of the registration statement filed, to register the
shares of common stock underlying the Series B1 Preferred Stock and May 2016 Warrants (the “May 2016 Lock-Up Period”), to not offer or sell any common
stock or securities convertible or exercisable into common stock, except pursuant to certain exceptions described in the May 2016 Purchase Agreement, and
each of the Company’s officers and directors agreed to not sell or offer for sale any shares of common stock until the end of the May 2016 Lock-Up Period,
subject to certain exceptions.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The May 2016 Warrants were valued using the dynamic Black Scholes Merton formula pricing model that computes the impact of share dilution upon the exercise
of the May 2016 Warrant shares at approximately $2,867,264. The dynamic Black Scholes Merton inputs used were: expected dividend rate of 0%, expected
volatility of 70%-100%, risk free interest rate of 1.22%, and expected term of 5.5 years. This valuation resulted in a beneficial conversion feature on the
convertible preferred stock of approximately $2,371,106. This amount will be accreted over the term as a deemed dividend. Fees in the amount of $0.6 million
relating to the stock placement were netted against proceeds. The May 2016 Warrants are exercisable beginning on November 14, 2016, and expire on
November 14, 2021.
The following table represents the carrying amount of the Series B1 Preferred Stock, classified as Temporary Equity on the Balance Sheet, at inception (May 13,
2016) and as of December 31, 2016:
Temporary Equity:
At Inception
Face amount of Series B1 Preferred
Less: May 2016 Warrant value
Less: May 2016 Beneficial Conversion Feature
Less: May 2016 issuance costs and fees
Carrying amount at inception
Face amount of Series B1 Preferred
Less: conversion of 403,217 shares to common
Plus: dividends-in-kind
Less: unaccreted discount
Carrying amount
May 13, 2016
19,349,745
2,867,264
2,371,106
607,880
13,503,495
December 31, 2016
19,349,745
628,866
435,369
5,400,064
13,756,184
$
$
$
$
In accordance with ASC 815-40-25 and ASC 815-10-15 Derivatives and Hedging and ASC 480-10-25 Liabilities-Distinguishing Liabilities from Equity, the
convertible Series B1 Preferred Stock shares are accounted for net outside of stockholders’ equity at $13,756,184 with the May 2016 Warrants accounted for as
liabilities at their fair value of $2,413,427 as of December 31, 2016. The value of the derivative warrant liability will be re-measured at each reporting period with
changes in fair value recorded as earnings. To derive an estimate of the fair value of these warrants, the Company utilized a dynamic Black Scholes Merton
formula that computes the impact of share dilution upon the exercise of the May 2016 Warrants. This process relies upon inputs such as shares outstanding,
estimated stock prices, strike price and volatility assumptions to dynamically adjust the payoff of the warrants in the presence of the dilution effect. In the event
the convertible Series B1 Preferred Stock shares are redeemed, any redemption price in excess of the carrying amount of the convertible Series B1 Preferred
Stock would be treated as a dividend.
The changes in liabilities measured using significant unobservable inputs for the year ended December 31, 2016 are described above within the Level Three Roll-
Forward table under Series B Preferred Stock and Temporary Equity.
The Certificate of Designation of the Series B1 Preferred Stock contains customary anti-dilution protection for proportional adjustments (e.g. stock splits). The
May 2016 beneficial conversion feature (BCF) relates to the potential difference between the effective conversion price (measured based on proceeds allocated
to the Series B1 Preferred Stock) and the fair value of the stock into which Series B1 Preferred Stock shares are currently convertible (common stock). If a
conversion option embedded in a debt host instrument does not require separate accounting as a derivative instrument under ASC 815, the convertible hybrid
instrument must be evaluated under ASC 470-20 for the identification of a possible BCF. The May 2016 BCF will be initially recognized as an offsetting reduction
to Series B1 Preferred Stock (debit) - Temporary Equity, with the credit being recognized in equity (additional paid-in capital). The resulting May 2016 debt
issuance costs, debt discount, value allocated to warrants, and BCF should be accreted to the Series B1 Preferred Stock to ensure that the Series B1 Preferred
Stock balance is equal to its face value as of the redemption or conversion date, if conversion is expected earlier.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The May 2016 BCF was determined by calculating the intrinsic value of the conversion feature as follows:
Face amount of Series B1 Preferred Stock
Less: allocated value of May 2016 Warrants
Allocated value of Series B1 Preferred Stock
Shares of Common stock to be converted
Effective conversion price
Market price
Intrinsic value per share
Intrinsic value of May 2016 beneficial conversion feature
May 13, 2016
19,349,756
2,867,264
16,482,492
12,403,683
1.33
1.52
0.19
2,371,106
$
$
$
$
$
$
For the year ending December 31, 2016 a total of $290,247 of dividends were accrued on our outstanding Series B1 Preferred Stock. We were prohibited from
paying such dividends in shares of common stock because the applicable 2016 Dividend Stock Payment Price was below $1.52. In the event the applicable
Dividend Stock Payment Price is below $1.52, we are required to pay such dividend in cash or in-kind in additional shares of Series B1 Preferred Stock. Pursuant
to the terms of our Credit Agreement, we are prohibited from paying the dividend in cash and therefore we paid the accrued dividends in-kind for the year ending
December 31, 2016 by way of the issuance of 282,172 of restricted shares of Series B1 Preferred Stock pro rata to each of the then holders of our Series B1
Preferred Stock during the year. If converted in full, the shares of Series B1 Preferred Stock would convert into an equal amount of our common stock shares.
On October 31, 2016, a holder of our Series B1 Convertible Preferred Stock converted 403,217 shares of our Series B1 Convertible Preferred Stock into 403,217
shares of our common stock. A total of $69,595 was recognized as a dividend to retained earnings.
Series C Convertible Preferred Stock
On January 29, 2016, we sold 44,000 shares of Series C Preferred Stock (as described below) in consideration for $4 million.
The Series C Convertible Preferred Stock ("Series C Preferred Stock"), authorized on January 29, 2016, does not accrue a dividend, but has participation rights
on an as-converted basis, to any dividends paid on the Company’s common stock (other than dividends paid solely in common stock). Each Series C Preferred
Stock share has a $100 face value, and a liquidation preference (in the amount of $100 per share) which is junior to the Company’s previously outstanding shares
of preferred stock (including the Series B and B1 Preferred Stock), senior credit facilities and other debt holders as provided in further detail in the designation,
but senior to the common stock.
The Series C Preferred Stock is convertible into shares of the Company’s common stock at the holder’s option at any time at $1.00 per share (initially each share
of Series C Preferred Stock is convertible into 100 shares of common stock (subject to adjustments for stock splits and recapitalizations)). The Series C Preferred
Stock votes together with the common stock on an as-converted basis (the "Voting Rights"), provided that each holder’s voting rights are subject to and limited by
the Series C Beneficial Ownership Limitation described below and provided further that notwithstanding any of the foregoing, solely for purposes of determining
the Voting Rights, the Voting Rights accorded to such Series C Convertible Preferred Stock will be determined as if converted at $1.05 per share (the market
value of the common stock as of the close of trading on the day prior to the original issuance date of the Series C Preferred Stock), and subject to equitable
adjustment as discussed in the designation. There are no redemption rights associated with the Series C Preferred Stock.
The Series C Preferred Stock contains a provision prohibiting the conversion of the Series C Preferred Stock into common stock of the Company, if upon such
conversion or exercise, as applicable, the holder thereof would beneficially own more than 4.999% of the Company’s then outstanding common stock (the “Series
C Beneficial Ownership Limitation”). The Series C Beneficial Ownership Limitation may be increased up and down on a per holder basis, with 61 days prior written
notice from any holder, provided the Series C Beneficial Ownership Limitation may never be higher than 9.999%.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
So long as any shares of Series C Preferred Stock are outstanding, we are prohibited from undertaking any of the following without first obtaining the approval of
the holders of a majority of the outstanding shares of Series C Preferred Stock: (a) increasing or decreasing (other than by redemption or conversion) the total
number of authorized shares of Series C Preferred Stock; (b) re-issuing any shares of Series C Preferred Stock converted; (c) creating, or authorizing the creation
of, or issuing or obligating the Company to issue shares of, any class or series of capital stock unless the same ranks junior to (and not pari passu with) the
Series C Preferred Stock with respect to the distribution of assets on the liquidation, dissolution or winding up of the Company, or increasing the authorized
number of shares of any additional class or series of capital stock unless the same ranks junior to (and not pari passu with) the Series C Preferred Stock with
respect to the distribution of assets on the liquidation, dissolution or winding up of the Company; (d) effecting an exchange, reclassification, or cancellation of all
or a part of the Series C Preferred Stock (except pursuant to the terms of the designation); (e) effecting an exchange, or creating a right of exchange, of all or part
of the shares of another class of shares into shares of Series C Preferred Stock (except pursuant to the terms of the designation); (f) issuing any additional
shares of Series C Preferred Stock; (g) altering or changing the rights, preferences or privileges of the shares of Series C Preferred Stock so as to affect
adversely the shares of such series; or (h) amending or waiving any provision of the Company’s Articles of Incorporation or Bylaws relative to the Series C
Preferred Stock so as to affect adversely the shares of Series C Preferred Stock in any material respect as compared to holders of other series of shares.
On August 2, 2016, the Company issued 1,243,200 shares of common stock in connection with the conversion of 12,432 shares of Series C Preferred stock. The
outstanding shares of Series C Preferred Stock at December 31, 2016 totaled 31,568.
NOTE 16. DISPOSITION
On January 28, 2016, the Company entered into an Asset Purchase Agreement (the “ Sale Agreement”) with Bango Oil, LLC (“ Bango Oil”) and Safety-Kleen
Systems Inc. (“Safety-Kleen”) pursuant to which the Company agreed to sell to Safety-Kleen the used oil re-refining plant on approximately 40 acres in Churchill
County, Nevada (the “Bango Plant”), which we previously rented, and all equipment, tools and other tangible personal property located at the Bango Plant, which
relate to or are used in connection with the operations of the Bango Plant (collectively, the “Bango Assets”) for an aggregate purchase price of $35 million. As
shown in the table below, a gain on sale of approximately $9.7 million was recorded associated with the sale. The gain on sale is included in the accompanying
consolidated statement of operations.
Sales price (fair value)
Release of lien on certain equipment at the Bango Plant
Transaction Fees
Net Proceeds
Book Value at January 29, 2016 (date transaction closed)
Gain on Sale
$
$
35,000,000
(3,100,000)
(2,111,886)
29,788,114
20,039,553
9,748,561
Net proceeds were used to pay an aggregate of $16.1 million toward the Credit Agreement with Goldman Sachs Bank (described in " Note 10. Line of Credit and
Long-Term Debt"), $9.3 million to exercise the Purchase Option (described below) and $1.5 million for equipment and rail park lease acquisitions subsequently
included in the Sale Agreement.
Additionally, at the closing, we placed $1.5 million in restricted cash and $1 million worth of our common stock (1,108,928 shares) into escrow with 50% of the
shares to be released to us 12 months following the closing and such cash and the remainder of the shares held in escrow to be released to us 18 months after
the closing, in order to satisfy any indemnification claims made by Safety-Kleen pursuant to the terms of the Sale Agreement. On June 30 and December 31 of
each year that any of our shares of common stock are in escrow, in the event the value of the shares held in escrow is less than $1 million, based on the then
market price of our common stock, we are required to increase the number of shares of common stock held in escrow to total $1 million in aggregate value (no
adjustment was required as of June 30, 2016 or December 31, 2016).
Finally, the Sale Agreement required the Company to use sale proceeds to exercise the purchase option set forth in that certain Lease With Option For
Membership Interest Purchase (the “Bango Lease”) entered into on April 30, 2015, by and between us, Vertex Refining NV and Bango Oil, whereby, we had the
option at any time during the term of the lease to purchase all of the equity interests of Bango Oil (the “Purchase Option”), effectively acquiring ownership of the
Bango Plant for $9.3 million. The Membership Interest Purchase Agreement contains standard and customary representations of the parties and indemnification
rights, subject in each case to a $3 million cap on aggregate indemnification. Upon the closing of the Membership Interest Purchase
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Agreement, we effectively obtained ownership of the Bango Plant, which we then sold to Safety-Kleen, and Bango Oil became a wholly-owned subsidiary of
Vertex Refining NV.
NOTE 17. NEW JOINT VENTURE
On May 25, 2016, Vertex Recovery Management, LLC, our wholly-owned subsidiary (" VRM") and Industrial Pipe, Inc. (" Industrial Pipe"), formed a joint venture
Louisiana limited liability company, Vertex Recovery Management LA, LLC ("VRMLA"). VRM owns 51% and Industrial Pipe owns 49% of VRMLA. VRMLA is
currently buying and preparing ferrous and non-ferrous scrap intended for large haul barge sales. We consolidated 100% of VRMLA's operating income of $4,447
for the year ended December 31, 2016 and then added the 49% or $2,179 income attributable to the non-controlling interest back to the Company's " Net income
(loss) attributable to Vertex Energy, Inc." in the Balance Sheet.
NOTE 18. SEGMENT REPORTING
The Company’s reportable segments include the Black Oil, Refining and Marketing and Recovery divisions. Segment information for the years ended
December 31, 2016 and 2015 are as follows:
YEAR ENDED DECEMBER 31, 2016
Black Oil
Refining and
Marketing
Recovery
Total
$
$
$
76,634,940 $
(8,849,055) $
80,774,533 $
13,154,777 $
(402,317) $
1,573,395 $
8,289,197 $
(861,142) $
4,638,040 $
98,078,914
(10,112,514)
86,985,968
YEAR ENDED DECEMBER 31, 2015
Black Oil
Refining and
Marketing
Recovery
Total
$
$
$
103,890,188 $
(15,957,969) $
87,326,506 $
31,154,066 $
363,708 $
1,845,669 $
11,898,207 $
1,501,220 $
4,472,641 $
146,942,461
(14,093,041)
93,644,816
Revenues
Net loss from operations
Total Assets
Revenues
Net loss from operations
Total Assets
NOTE 19. SUBSEQUENT EVENTS
Credit and Guaranty Agreement
Effective February 1, 2017, Vertex Energy, Vertex Operating, LLC and substantially all of Vertex Energy’s other operating subsidiaries, other than E-Source,
entered into a Credit Agreement (the “EBC Credit Agreement ”) with Encina Business Credit, LLC as agent (the “ Agent” or “EBC”) and Encina Business Credit
SPV, LLC and CrowdOut Capital LLC as lenders thereunder (the “EBC Lenders”). Pursuant to the EBC Credit Agreement, and the terms thereof, the EBC
Lenders agreed to loan us up to $20 million. A total of $12 million was loaned to us by the EBC Lenders on February 1, 2017 pursuant to the terms of the EBC
Credit Agreement, and a total of an additional $8 million in funding may be requested by us from the EBC Lenders, from time to time, subject to the terms of the
EBC Credit Agreement, and the conditions for lending set forth therein. Amounts borrowed under the EBC Credit Agreement bear interest at 12%, 13% or 14%
per annum, based on the ratio of (a) (i) consolidated EBITDA for such applicable period minus (ii) capital expenditures made during such period, minus (iii) the
aggregate amount of income taxes paid in cash during such period (but not less than zero) to (b) the sum of (i) debt service charges plus (ii) the aggregate
amount of all dividend or other distributions paid on capital stock in cash for the most recently completed 12 month period (which ratio falls into one of the three
following tiers: less than 1 to 1; from 1 to 1 to less than 1.45 to 1; or equal to or greater than 1.45 to 1, which together with the value below, determines which
interest rate is applicable) and average availability under the Revolving Credit Agreement (defined below) (which falls into two tiers: less than $2.5 million and
greater than or equal to $2.5 million, which together with the calculation above, determines which interest rate is applicable), as described in greater detail in the
EBC Credit Agreement (increasing by 2% per annum upon the occurrence of an event of
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
default). Interest on amounts borrowed under the EBC Credit Agreement is payable by us in arrears, on the first business day of each month, beginning on the
first business day of the first full month following the closing, together with required $75,000 monthly principal repayments. We also have the right to make
voluntary repayments of the amount owed under the EBC Credit Agreement in amounts equal to or greater than $100,000, from time to time. The EBC Credit
Agreement terminates on February 1, 2020, on which date we are required to repay the outstanding balance owed thereunder and any accrued and unpaid
interest thereon.
Revolving Credit Facility with Encina Business Credit, LLC
Effective February 1, 2017, Vertex Energy, Vertex Operating and substantially all of Vertex Energy’s operating subsidiaries, other than E-Source, entered into a
Revolving Credit Agreement (the “Revolving Credit Agreement ”) with Encina Business Credit SPV, LLC as lender (the “ Lender”) and EBC as the administrative
agent. Pursuant to the Revolving Credit Agreement, and the terms thereof, the Lender agreed to loan us, on a revolving basis, up to $10 million, subject to the
terms of the Revolving Credit Agreement and certain lending ratios set forth therein. Amounts borrowed under the Revolving Credit Agreement bear interest,
subject to the terms of the Revolving Credit Agreement, at the one month LIBOR interest rate then in effect, subject to a floor of 0.25% (which interest rate is
currently approximately 0.78% per annum), plus an additional 6.50% per annum (increasing by 2% per annum upon the occurrence of an event of default),
provided that under certain circumstances amounts borrowed bear interest at the higher of (a) the “prime rate”; (b) the Federal Funds Rate, plus 0.50%; and (c)
the LIBOR Rate for a one month interest period, plus 1.00%). Interest on amounts borrowed under the Revolving Credit Agreement is payable by us in arrears, on
the first business day of each, beginning on the first business day of the first full month following the closing. The Revolving Credit Agreement terminates on
February 1, 2020, on which date we are required to repay the outstanding balance owed thereunder and any accrued and unpaid interest thereon.
Debt and Revolving Note Repayment
A total of $11,282,537 of the amount borrowed under the EBC Credit Agreement and Revolving Credit Agreement was used to repay amounts owed under (a) the
Restated Goldman Credit Agreement, (b) the MidCap Loan Agreement; and (c) the Fox Note (collectively, “Existing Credit Obligations ”), all of which have been
repaid in full as of the date of this filing. Additionally, in connection with the repayment of such obligations, the Restated Goldman Credit Agreement and Midcap
Loan, and our right to borrow funds thereunder were terminated.
Issuance of Series B and B1 Preferred Stock Shares in-Kind
Pursuant to the terms of our Goldman Credit Agreement, we were prohibited from paying dividends in cash on our Series B Preferred Stock and Series B1
Preferred Stock and therefore we paid the accrued dividends on our Series B Preferred Stock and Series B1 Preferred Stock, which accrued as of December 31,
2016, in-kind by way of the issuance of 48,447 restricted shares of Series B Preferred Stock pro rata to each of the then holders of our Series B Preferred Stock
in January 2017 and the issuance of 184,297 restricted shares of Series B1 Preferred Stock pro rata to each of the then holders of our Series B1 Preferred Stock
in January 2017. If converted in full, the 48,447 shares of Series B Preferred Stock would convert into 48,447 shares of common stock and the 184,297 shares of
Series B1 Preferred Stock would convert into 184,297 shares of common stock.
Conversion of Series B1 and Series A Convertible Preferred Stock
In January 2017, two holders of our Series B1 Convertible Preferred Stock converted 66,564 and 10,000 shares, respectively, of our Series B1 Convertible
Preferred Stock into 66,564 and 10,000 shares, respectively, of our common stock.
In January 2017, a holder of our Series A Convertible Preferred Stock converted 30,072 shares of our Series A Convertible Preferred Stock into 30,072 shares of
our common stock.
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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
We have established and maintain a system of disclosure controls and procedures that are designed to provide reasonable assurance that information
required to be disclosed in our reports filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934 , as amended, is
recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Commission and that such information is
accumulated and communicated to our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), as appropriate, to allow
timely decisions regarding required disclosures.
Management, with the participation of our CEO and CFO, evaluated the effectiveness of the design and operation of our disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) as of December 31, 2016, the end of the fiscal period
covered by this report. As of December 31, 2016, based on the evaluation of these disclosure controls and procedures, our CEO and CFO have concluded that
our disclosure controls and procedures were not effective to provide reasonable assurance that information required to be disclosed in our reports filed with the
Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within
the time periods specified in the rules and forms of the Commission and that such information is accumulated and communicated to our management, including
our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosures.
Managements’ Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining effective internal control over financial reporting as defined in Rule 13a-15(f) and 15d-15(f)
under the Securities and Exchange Act of 1934, as amended. Internal control over financial reporting is a process designed by, or under the supervision of, our
CEO and CFO, and effected by the Company’s board of directors, management or other personnel to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United
States of America.
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 of the Company has assessed the effectiveness of our internal control over financial reporting as of December 31, 2016, using the criteria
established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility
that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. In our assessment of the
effectiveness of internal control over financial reporting as of December 31, 2016, we determined that a control deficiency existed that constituted a material
weakness, as described below:
•
The Company does not have the accounting and financial reporting resources to adequately and timely address complex and unusual accounting issues
and related disclosures as well as perform a high level management review to detect material errors in the financial statements.
The material weakness described above could result in disclosures that would result in a material misstatement of the consolidated financial statements
that would not be prevented or detected. The material weakness described above relates to the complicated acquisition transactions undertaken by the Company
in fiscal 2016 and moving forward we plan to address the material weakness described above by (a) seeking outside assistance from third parties when or if we
enter into or effect transactions which raise complex financial accounting issues and related disclosures and (b) implementing additional disclosure controls and
procedures to facilitate high level management review in order to detect material errors in our financials.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
As a result of the material weakness described above, management has concluded that we did not maintain effective internal control over financial
reporting as of December 31, 2016, based on the criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
In light of the material weaknesses described above, we have performed additional analysis and other post-year end procedures to ensure our
consolidated financial statements are prepared in accordance with generally accepted accounting principles and we have contracted with experts, where
necessary, for assistance in analyzing and determining the proper accounting and financial reporting treatment for various of the Company's complicated business
transactions. Accordingly, management has concluded that the financial statements fairly present in all material respects our financial condition, results of
operations and cash flows as at, and for, the periods presented in this report.
Changes in Internal Control over Financial Reporting
We regularly review our system of internal control over financial reporting to ensure we maintain an effective internal control environment. There were no
changes in our internal control over financial reporting that occurred during the year that have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
Item 9B. Other Information
On December 14, 2016, and effective January 1, 2017, we entered into a Third Amendment to Processing Agreement with KMTEX, which amended the April 17,
2013 (effective June 1, 2012) Tolling Agreement we are party to with KMTEX, as previously amended by the First Amendment entered into in November 2013,
and effective November 1, 2013 and the Second Amendment entered into on December 3, 2015, and effective January 1, 2016. The amendment formally
extended the date of the initial term of the Tolling Agreement to December 31, 2018, provided that if not terminated by either party by written notice to the other,
received within ninety (90) days prior to the expiration of the initial term, as amended (or any Extension Term, defined below), the agreement automatically
renews for a successive one (1) year period (an “Extension Term”). The Tolling Agreement can be automatically extended for up to six (6) Extension Terms from
the end of the extended initial term. The amendment also updated the pricing terms of the agreement.
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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”, “Code of
Conduct”, “Committees of the Board”, and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s 2016 Proxy Statement to be filed with
the U.S. Securities and Exchange Commission (“SEC”) within 120 days after December 31, 2016 in connection with the solicitation of proxies for the Company’s
2017 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 and Director Compensation”, “Executive Compensation”, “Directors
Compensation”, “Outstanding Equity Awards at Fiscal Year-End”, “Compensation Committee Interlocks and Insider Participation ” and “Compensation Committee
Report” (to the extent required), in the Company’s 2017 Proxy Statement to be filed with the SEC within 120 days after December 31, 2016 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 heading “ Voting Rights and Principal Stockholders” in the Company’s 2017 Proxy
Statement to be filed with the SEC within 120 days after December 31, 2016 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 “Committees of the Board”
- “Director Independence” in the Company’s 2017 Proxy Statement to be filed with the SEC within 120 days after December 31, 2016 and is incorporated herein
by reference.
Item 14. Principal Accounting Fees and Services
The information required by this Item will be set forth under the heading " Ratification of Appointment of Auditors"-"Audit Fees" in the Company's 2017
Proxy Statement to be filed with the SEC within 120 days after December 31, 2016 and is incorporated herein by reference.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Item 15. Exhibits, Financial Statement Schedules
(a) Documents filed as part of this report
(1) All financial statements
PART IV
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2016 and 2015
Consolidated Statements of Operations for the years ended December 31, 2016 and 2015
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2016 and 2015
Consolidated Statements of Cash Flows for the years ended December 31, 2016 and 2015
Notes to Consolidated Financial Statements
(1) Financial Statement Schedules
Index to Financial Statement Schedules
Selected Quarterly Financial Information (Unaudited)
Statements of Operations by Segments (Unaudited)
Page
F-2
F-3
F-5
F-6
F-7
F-9
Page
58
58
Except as provided above, 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.
(2) 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.
91
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 13, 2017
Date: March 13, 2017
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 Accounting/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
By:
/s/ Chris Carlson
Benjamin P. Cowart
Chief Executive Officer
(Principal Executive Officer)
and Chairman
Chris Carlson
Chief Financial Officer
(Principal Accounting/Financial Officer)
Date:
March 13, 2017
Date:
March 13, 2017
By:
/s/ Christopher Stratton
By:
/s/ Dan Borgen
Christopher Stratton
Director
Dan Borgen
Director
Date:
March 13, 2017
Date:
March 13, 2017
By:
/s/ Timothy C. Harvey
Timothy C. Harvey
Director
By:
/s/ David Phillips
David Phillips
Director
Date:
March 13, 2017
Date:
March 13, 2017
By:
/s/ James P. Gregory
James P. Gregory
Director
Date:
March 13, 2017
92
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
EXHIBIT INDEX
Exhibit
Number
2.1
2.2
2.3(#)
2.4
2.5
2.6
2.7
2.8
2.9(+)
2.10(+)
3.1
3.2
Asset Purchase Agreement by and among Vertex Energy, Inc., Vertex
Refining LA, LLC., Vertex Refining NV., LLC, Omega Refining, LLC, Bango
Refining NV, LLC and Omega Holdings Company LLC (March 17, 2014)
Second Amendment to Asset Purchase Agreement by and among Vertex
Energy, Inc., Vertex Refining LA, LLC, Vertex Refining NV, LLC, Bango
Refining NV, LLC and Omega Holdings Company LLC (April 30, 2014)
Third Amendment to Asset Purchase Agreement by and among Vertex
Energy, Inc., Vertex Refining LA, LLC, Vertex Refining NV, LLC, Bango
Refining NV, LLC and Omega Holdings Company LLC (May 2, 2014)
Fourth Amendment to Asset Purchase Agreement by and among Vertex
Energy, Inc., Vertex Refining LA, LLC, Vertex Refining NV, LLC, Louisiana
LV OR LLC, formerly known as Omega Refining, LLC, Bango Refining NV,
LLC and Omega Holdings Company LLC (January 19, 2015)
Asset Purchase Agreement by and among Vertex Energy Operating, LLC,
Vertex Refining OH, LLC, Vertex Energy Inc. and Heartland Group
Holdings, LLC (October 21, 2014)
First Amendment to Asset Purchase Agreement by and among Vertex
Energy Operating, LLC, Vertex Refining OH, LLC, Vertex Energy, Inc. and
Heartland Group Holdings, LLC (November 26, 2014)
Second Amendment to Asset Purchase Agreement by and among Vertex
Energy Operating, LLC, Vertex Refining OH, LLC, Vertex Energy, Inc. and
Heartland Group Holdings, LLC (December 5, 2014)
Third Amendment to Asset Purchase Agreement by and among Vertex
Energy Operating, LLC, Vertex Refining OH, LLC, Vertex Energy, Inc. and
Heartland Group Holdings, LLC (March 4, 2015)
Asset Purchase Agreement by and among Vertex Energy, Inc., Vertex
Energy Operating, LLC, Bango Oil, LLC and Safety-Kleen Systems, Inc.
(January 28, 2016)
Membership Interest Purchase Agreement (January 29, 2016), by and
among Vertex Refining NV, LLC, as buyer and Fox Encore 05 LLC, as
seller
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.
93
Incorporated by Reference
Filed or
Furnished
Herewith
Form
File No.
8-K
2.1
3/19/2014
001-11476
8-K
2.3
5/6/2014
001-11476
8-K
2.4
5/6/2014
001-11476
8-K
2.1
1/21/2015
001-11476
8-K
2.1
10/28/2014
001-11476
8-K
2.2
12/1/2014
001-11476
8-K
2.3
12/9/2014
001-11476
8-K
2.4
3/6/2015
001-11476
8-K
2.1
2/3/2016
001-11476
8-K
8-K/A
2.2
3.1
2/3/2016
6/26/2009
001-11476
000-53619
8-K
3.1
7/16/2010
000-53619
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Exhibit
Number
3.3
3.4
3.5
3.6
10.1(#)
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
(#)
10.15
Amended and Restated Certificate of Designation of Vertex Energy, Inc.
Establishing the Designation, Preferences, Limitations and Relative Rights
of Its Series B Preferred Stock, filed with the Secretary of State of Nevada
on May 12, 2016
Amended and Restated Certificate of Designation of Vertex Energy, Inc.
Establishing the Designation, Preferences, Limitations and Relative Rights
of Its Series C Convertible Preferred Stock, filed with the Secretary of State
of Nevada on May 12, 2016
Certificate of Designation of Vertex Energy, Inc. Establishing the
Designation, Preferences, Limitations and Relative Rights of Its Series B1
Preferred Stock, filed with the Secretary of State of Nevada on May 12,
2016
Amended and Restated Bylaws of Vertex Energy, Inc.
Tolling Agreement between KMTEX, Ltd. and Vertex Energy Inc., dated
April 17, 2013
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***
2004 Stock Option Plan - World Waste Technologies, Inc.***
Form of Stock Option Agreement, pursuant to 2004 Stock Option Plan***
2007 Stock Plan - World Waste Technologies, Inc.***
Form of Stock Option Agreement, pursuant to 2007 Stock Option Plan***
Vertex Energy, Inc., 2008 Stock Incentive Plan***
2008 Stock Incentive Plan - Form of Stock Option Agreement***
Vertex Energy, Inc., 2009 Stock Incentive Plan***
2009 Stock Incentive Plan - Form of Stock Option Agreement***
Vertex Energy, Inc. 2013 Stock Incentive Plan***
Vertex Energy, Inc.-Form of 2013 Stock Incentive Plan Stock Option
Award***
Vertex Energy, Inc.-Form of 2013 Stock Incentive Plan Restricted Stock
Grant Agreement***
Credit and Guaranty Agreement dated as of May 2, 2014, by and among
Vertex Energy Operating, LLC, Vertex Energy, Inc., and certain other
subsidiaries of Vertex Energy, Inc., as Guarantors, and Goldman Sachs
USA, as Lender and as Administrative Agent, Collateral Agent, and Lead
Arranger
Term Loan Note ($40,000,000)-Credit and Guaranty Agreement dated as
of May 2, 2014
94
Incorporated by Reference
Filed or
Furnished
Herewith
Form
File No.
8-K
3.1
5/13/2016
001-11476
8-K
3.2
5/13/2016
001-11476
8-K
8-K
8-K
3.3
3.1
5/13/2016
1/15/2014
001-11476
001-11476
10.1
11/12/2013
001-11476
10-Q
10-KSB
10-KSB
8-K
8-K
8-K/A
10-K
8-K
10-K
S-8
8-K
S-8
8-K
8-K
10.19
10.3
10.4
10.2
10.3
4.1
10.27
4.1
10.29
4.1
9/30/2012
12/31/2004
12/31/2004
5/21/2007
5/21/2007
6/26/2009
12/31/2012
7/31/2009
12/31/2012
7/28/2014
000-53619
001-11476
001-11476
001-11476
001-11476
000-53619
001-11476
000-53619
001-11476
333-197659
10.1
9/30/2013
001-11476
4.3
7/28/2014
333-197659
10.3
5/6/2014
001-11476
10.4
5/6/2014
001-11476
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Exhibit
Number
10.16 (#)
10.17
10.18
10.19
Amended and Restated Credit Agreement, among Vertex Energy, Inc., and
Vertex Energy Operating, LLC, as Borrowers and Bank of America, N.A., as
Lender as of May 2, 2014
Revolving Note ($20,000,000)-Amended and Restated Credit Agreement,
as of May 2, 2014
Amended and Restated Guaranty-Amended and Restated Credit
Agreement, as of May 2, 2014
Intercreditor Agreement, May 2, 2014, by and among Bank of America,
N.A. and Goldman Sachs Bank USA
10.20 (#)
Pledge and Security Agreement-Credit and Guaranty Agreement dated as
of May 2, 2014
10.21
10.22
10.23
10.24
10.25
10.26(##)
10.27(##)
10.28
10.29
10.30
10.31
Employment Agreement between Vertex Refining LA, LLC and James P.
Gregory (Effective May 2, 2014)***
Form of Common Stock Purchase Agreement dated June 5, 2014 by and
between Vertex Energy, Inc. and the purchasers named therein
Land Lease between Marrero Terminal LLC, as Landlord and Omega
Refining, LLC, as Tenant, relating to the Used Motor Oil Re-Refinery
Located at 5000 River Road, Marrero, Louisiana 70094, dated as of April
30, 2008 and amendments
Commercial Lease between Plaquemines Holdings, LLC as Landlord and
Omega Refining, LLC, as Tenant, relating to the Myrtle Grove Facility
Located at 278 East Ravenna Road, Myrtle Grove, LA, dated as of May 25,
2012 and amendments
Operation and Maintenance Agreement dated as of November 3, 2010, by
and between Magellan Terminals Holdings, L.P. (f/k/a Marrero Terminal,
LLC) and Omega Refining, LLC
Terminaling Services Agreement between Marrero Terminal LLC (Owner)
and Omega Refining, LLC (Customer) dated as of May 1, 2008
Second Use Motor Oil Buy/Sell Contract dated August 1, 2012, by and
between Thermo Fluids, Inc. and Omega Refining, LLC
Common Stock Purchase Warrant to purchase 109,934 shares of common
stock of the Company held by The Benjamin Paul Cowart 2012 Grantor
Retained Trust (December 4, 2014)
Common Stock Purchase Warrant to purchase 109,934 shares of common
stock of the Company held by The Shelley T. Cowart 2012 Grantor
Retained Trust (December 4, 2014)
Form of Subscription Agreement dated December 4, 2014
First Amendment to Credit and Guaranty Agreement between Vertex
Energy Operating, LLC, Vertex Energy, Inc. and Goldman Sachs Bank
USA (December 5, 2014)
95
Incorporated by Reference
Filed or
Furnished
Herewith
Form
File No.
8-K
8-K
8-K
8-K
8-K
8-K
8-K
10.6
5/6/2014
001-11476
10.7
5/6/2014
001-11476
10.9
5/6/2014
001-11476
10.1
5/6/2014
001-11476
10.5
5/6/2014
001-11476
10.1
7/29/2014
001-11476
10.1
6/6/2014
001-11476
10-Q
10.22
6/30/2014
001-11476
10-Q
10.23
6/30/2014
001-11476
10-Q
10.24
6/30/2014
001-11476
10-Q
10.25
6/30/2014
001-11476
10-Q
10.26
6/30/2014
001-11476
8-K
4.1
12/9/2014
001-11476
8-K
8-K
4.2
10.20
12/9/2014
12/9/2014
001-11476
001-11476
8-K
10.3
12/9/2014
001-11476
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Exhibit
Number
10.32
10.33
10.34
10.35
10.36(##)
10.37
10.38
10.39
10.40
10.41
10.42
First Amendment to Amended and Restated Credit Agreement between
Vertex Energy Operating, LLC, Vertex Energy, Inc. and Bank of America,
N.A. (December 5, 2014)
First Amendment to Secured Promissory Note dated January 7, 2015 -
Omega Refining, LLC and Bango Refining NV, LLC as borrowers and
Vertex Refining NV, LLC as lender
Second Amendment to Credit and Guaranty Agreement dated March 26,
2015, by and between Vertex Energy Operating, LLC, Vertex Energy, Inc.,
certain of the Company’s subsidiaries, Goldman Sachs Specialty Lending
Holdings, Inc. (“Lender”) and Goldman Sachs Bank USA. as Administrative
Agent and Collateral Agent for Lender
Common Stock Purchase Warrant to purchase 1,766,874 shares of
common stock dated March 26, 2015, by Vertex Energy, Inc., in favor of
Goldman, Sachs & Co.
Loan and Security Agreement between Vertex Energy, Inc., Vertex Energy
Operating, LLC, Vertex Acquisition Sub, LLC, Vertex Refining LA, LLC,
Vertex II GP, LLC, Vertex Merger Sub, LLC, Cedar Marine Terminals, LP,
Crossroad Carriers, L.P., H & H Oil, L. P., and Vertex Recovery, L.P., as
borrower and MidCap Business Credit LLC, as lender, dated March 27,
2015
Revolving Note by Vertex Energy, Inc., Vertex Energy Operating, LLC,
Vertex Acquisition Sub, LLC, Vertex Refining LA, LLC, Vertex II GP, LLC,
Vertex Merger Sub, LLC, Cedar Marine Terminals, LP, Crossroad Carriers,
L.P., H & H Oil, L. P., and Vertex Recovery, L.P. in favor of MidCap
Business Credit LLC dated March 27, 2015, in the face amount of up to $7
million [provided that notwithstanding the face amount of such Revolving
Note, the Revolving Note only evidences amounts borrowed under such
security from time to time]
Intercreditor Agreement dated March 26, 2015, by and between MidCap
Business Credit LLC and Goldman Sachs Bank USA
Lease With Option For Membership Interest Purchase (April 30, 2015), by
and between Vertex Refining NV, LLC as lessee and Bango Oil, LLC, as
landowner
Acknowledgement and Confirmation Agreement (April 30, 2015), by and
among Vertex Energy, Inc., Vertex Refining NV, LLC, Bango Oil, LLC,
RESC, LLC, and Diatom Rail Park, LLC
Personal Property Lease (April 30, 2015), by and between Vertex Refining
NV, LLC, Omega Refining, LLC and Bango Refining NV, LLC
Consent Letter (April 30, 2015) From Goldman Sachs Bank USA
Incorporated by Reference
Filed or
Furnished
Herewith
Form
File No.
8-K
10.4
12/9/2014
001-11476
8-K
10.2
1/15/2015
001-11476
8-K
10.1
3/31/2015
001-11476
8-K
10.2
3/31/2015
001-11476
8-K/A
10.3
6/16/2015
001-11476
8-K
8-K
10.4
3/31/2015
001-11476
10.5
3/31/2015
001-11476
8-K
10.1
5/5/2015
001-11476
8-K
8-K
8-K
10.2
5/5/2015
001-11476
10.3
10.4
5/5/2015
5/5/2015
001-11476
001-11476
96
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Exhibit
Number
10.43
10.44
10.45
10.46
10.47
10.48
Third Amendment to Credit and Guaranty Agreement dated June 18, 2015,
by and between Vertex Energy Operating, LLC, Vertex Energy, Inc., certain
of the Company’s subsidiaries, Goldman Sachs Specialty Lending
Holdings, Inc. (“Lender”) and Goldman Sachs Bank USA, as Administrative
Agent and Collateral Agent for Lender
Form of Unit Purchase Agreement dated June 19, 2015 by and between
Vertex Energy, Inc. and the purchasers named therein
Form of Warrant (incorporated by reference to Exhibit B of the Form of Unit
Purchase Agreement incorporated by reference herein as Exhibit 10.32)
Executive Employment Agreement with Benjamin P. Cowart (August 7,
2015)***
Executive Employment Agreement with Chris Carlson (August 7, 2015)***
Amended and Restated 2013 Stock Incentive Plan ***
10.49(##)
First Amendment to Processing Agreement between KMTEX LLC and
Vertex Energy, Inc., effective November 1, 2013
10.50
Executive Employment Agreement with John Strickland (COO), effective
October 1, 2015
Fourth Amendment to Credit and Guaranty Agreement dated November 9,
2015, by and between Vertex Energy Operating, LLC, Vertex Energy, Inc.,
certain of the Company’s subsidiaries, Goldman Sachs Specialty Lending
Holdings, Inc. (“Lender”) and Goldman Sachs Bank USA, as Administrative
Agent and Collateral Agent for Lender
First Amendment to Loan and Security Agreement between Vertex Energy,
Inc., Vertex Energy Operating, LLC, Vertex Acquisition Sub, LLC, Vertex
Refining LA, LLC, Vertex II GP, LLC, Vertex Merger Sub, LLC, Cedar
Marine Terminals, LP, Crossroad Carriers, L.P., H & H Oil, L. P., and
Vertex Recovery, L.P., as borrower and MidCap Business Credit LLC, as
lender, dated November 9, 2015
Second Amendment to Processing Agreement between KMTEX LLC and
Vertex Energy, Inc., dated December 3, 2015 and effective January 1,
2016
Swap Agreement dated January 29, 2016, by Vertex Energy Operating,
LLC and Safety-Kleen Systems, Inc.
Base Oil Sales Agreement dated January 29, 2016, by Vertex Energy
Operating, LLC and Safety-Kleen Systems, Inc.
Subscription Agreement for Series C Convertible Preferred Stock executed
by Fox Encore 05 LLC (January 29, 2016)
10.51
10.52
10.53(##)
10.54(##)
10.55(##)
10.56
97
Incorporated by Reference
Filed or
Furnished
Herewith
Form
File No.
8-K
8-K
8-K
10-Q
10-Q
8-K
10.2
6/24/2015
001-11476
10.1
6/19/2015
001-11476
10.3
6/19/2015
001-11476
10.73
10.74
10.1
6/30/2015
6/30/2015
9/21/2015
001-11476
001-11476
001-11476
8-K/A
10.2
11/10/2015
001-11476
8-K
10.1
10/19/2015
001-11476
10-Q
10.78
9/30/2015
001-11476
10-Q
10.79
9/30/2015
001-11476
8-K
8-K
8-K
8-K
10.1
1/15/2016
001-11476
10.1
2/3/2016
001-11476
10.2
2/3/2016
001-11476
10.3
2/3/2016
001-11476
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Exhibit
Number
10.57
10.58
10.59
10.60
10.61
10.62
10.63
10.64
10.65
10.66
(###)
14.1
16.1
Promissory Note in the amount of $5.15 million dated January 29, 2016, by
Vertex Refining OH, LLC, as borrower and Fox Encore 05 LLC as lender
Open-End Mortgage, Security Agreement, Fixture Filing and Assignment of
Leases and Rents by Vertex Refining OH, LLC in favor of Fox Encore 05
LLC (January 29, 2016)
Amended and Restated Credit and Guaranty Agreement, dated January
29, 2016, by and among Vertex Energy Operating, LLC, Vertex Energy,
Inc., and certain other subsidiaries of Vertex Energy, Inc., as guarantors,
various lenders, and Goldman Sachs Bank USA, as Administrative Agent,
Collateral Agent, and Lead Arranger
Amendment No. 1 to Amended and Restated Credit and Guaranty
Agreement dated May 9, 2016 by and among Vertex Energy Operating,
LLC, Vertex, Energy, Inc., the other credit parties party thereto, Goldman
Sachs Specialty Lending Holdings, Inc., as a lender and Goldman Sachs
Bank USA, as administrative agent
Form of Unit Purchase Agreement dated May 10, 2016 by and between
Vertex Energy, Inc. and the purchasers named therein
Form of Warrant for May 2016 Unit Offering
Credit Agreement dated as of February 1, 2017, by and among Vertex
Energy Operating, LLC, as the Lead Borrower for the Borrowers named
therein, the Guarantors named therein, Encina Business Credit, LLC as
Agent and the Lenders party thereto
ABL Credit Agreement dated as of February 1, 2017, by and among Vertex
Energy Operating, LLC, as the Lead Borrower for the Borrowers named
therein, the Guarantors named therein, Encina Business Credit, LLC as
Agent and the Lenders party thereto
Form of Guaranty and Security Agreement, dated as of February 1, 2017,
by and among Vertex Energy Operating, LLC, Bango Oil LLC, Vertex
Refining NV, LLC, Vertex Refining OH, LLC, Vertex Merger Sub, LLC,
Vertex Refining LA, LLC, Vertex II GP, LLC, Vertex Acquisition Sub, LLC,
Cedar Marine Terminals, LP, Vertex Recovery, L.P., Golden State
Lubricants Works, LLC, Crossroad Carriers, L.P., Vertex Recovery
Management, LLC, Vertex Recovery Management LA, LLC H & H Oil, L.P.,
and Vertex Energy, Inc. and each other grantor from time to time party
thereto and Encina Business Credit, LLC, as Agent
Third Amendment to Processing Agreement between KMTEX LLC and
Vertex Energy, Inc., entered into on December 14, 2016, and effective
January 1, 2017*
X
Filed or
Furnished
Herewith
Incorporated by Reference
Form
File No.
8-K
10.4
2/3/2016
001-11476
8-K
10.5
2/3/2016
001-11476
8-K
10.6
2/3/2016
001-11476
8-K
8-K
8-K
10.1
5/10/2016
001-11476
10.2
10.2
5/10/2016
5/13/2016
001-11476
001-11476
8-K
10.1
2/7/2017
001-11476
8-K
10.2
2/7/2017
001-11476
8-K
10.3
2/7/2017
001-11476
Code of Ethical Business Conduct and Whistleblower Protection Policy
Letter dated April 30, 2015 From LBB & Associates Ltd., LLP
8-K/A
8-K
14.1
16.1
2/13/2013
5/1/2015
001-11476
001-11476
98
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Incorporated by Reference
Filed or
Furnished
Herewith
Form
File No.
Subsidiaries*
Consent of Hein & Associates 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**
X
X
X
X
X
X
Glossary of Selected Terms
10-K
99.1
12/31/2012
001-11476
Exhibit
Number
21.1
23.1
31.1
31.2
32.1
32.2
99.1
Charters Of The Compensation Committee; Audit Committee; Nominating
And Corporate Governance Committee; and Related Party Transaction
Committee
Charter of Risk Committee
Amended Charter of the Compensation Committee effective July 24, 2014
99.2
99.3
99.4
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
8-K/A
10-Q
10-Q
99.2
99.2
99.1
2/13/2013 001-11476
9/30/2013
001-11476
9/30/2014 001-11476
X
X
X
X
X
X
* Filed herewith.
** Furnished herewith.
*** Indicates management contract or compensatory plan or arrangement.
# Certain portions of these documents (which portions have been replaced by “ X’s”) have been omitted in connection with a request for Confidential Treatment
which has been accepted by the Commission. This entire exhibit including the omitted confidential information has been filed separately with the Commission.
## Certain portions of this document (which portions have been replaced by “ ***’s”) have been omitted in connection with a request for Confidential Treatment
which has been accepted by the Commission. This entire exhibit including the omitted confidential information has been filed separately with the Commission.
99
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
### Certain portions of this document as filed herewith (which portions have been replaced by “ ***’s”) have been omitted in connection with a request for
Confidential Treatment which has been submitted to the Commission in connection with this filing. This entire exhibit including the omitted confidential information
has been filed separately with the Commission.
+ Certain schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. A copy of any omitted schedule or exhibit will be furnished
supplementally to the Securities and Exchange Commission upon request; provided, however that Vertex Energy, Inc. may request confidential treatment
pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, for any schedule or exhibit so furnished.
100
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
**************************************************
MATERIAL BELOW MARKED BY AN “***” HAS BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.
THIS ENTIRE EXHIBIT INCLUDING THE OMITTED CONFIDENTIAL INFORMATION HAS BEEN FILED SEPARATELY WITH THE
COMMISSION.
**************************************************
THIRD AMENDMENT TO PROCESSING AGREEMENT
This THIRD AMENDMENT TO PROCESSING AGREEMENT (3rd Amendment”) is entered into effective this 1st day of January, 2017
(“Effective Date”) by and between Vertex Energy, Inc., a Texas Corporation having an office at 200 Atlantic Pipeline Road
(“CUSTOMER”) and KMTEX LLC, Texas Limited Liability Corporation, having an office at 363 North Sam Houston Parkway East,
Suite 1040, Houston, Texas 77060 (“KMTEX”).
WITNESSETH
WHEREAS, effective July l, 2012, CUSTOMER and KMTEX entered into an agreement for the processing of certain petroleum
distillates (“Processing Agreement”);
WHEREAS, effective November 1, 2013, CUSTOMER and KMTEX amended the Agreement for the processing of certain petroleum
distillates (“First Amendment to the Processing Agreement”);
WHEREAS, effective January 1, 2015, CUSTOMER and KMTEX amended the Agreement for the processing of certain petroleum
distillates (“Second Amendment to the Processing Agreement”);
WHEREAS, CUSTOMER and KMTEX wish to restate and revise the term and fee schedule of the Processing Agreement;
NOW THEREFORE, these premises considered, the parties agree to amend the Processing Agreement as follows:
l. Section 2.1 of the Agreement under Article 2 entitled Term and Termination will be deleted in its entirety and the following
substituted in its place:
Section 2.1 This agreement commences on the Effective Date and its Initial Term shall expire on December 31, 2018, subject to the
other provisions in this Agreement, or as otherwise agreed to by the Parties.
2.
Attachment D entitled Fees & Quantities will be deleted in its entirety and the following substituted in its place:
Page 1 of 1 Page 1 of 1 CONFIDENTIAL TREATMENT REQUESTED BY
Vertex Energy, Inc.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
**************************************************
MATERIAL BELOW MARKED BY AN “***” HAS BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.
THIS ENTIRE EXHIBIT INCLUDING THE OMITTED CONFIDENTIAL INFORMATION HAS BEEN FILED SEPARATELY WITH THE
COMMISSION.
**************************************************
Attachment-D - Fees & Quantities
• PYGAS FEED
❑ Processing fee:
1/1/17 thru
6/30/17
7/1/17 thru
12/31/17
1/1/18 thru
12/31/18
Processing Fee $/lb of
Feed Processed
$***
$***
$***
•
Includes a dedicated *** barrel tank for overheads. This tank will be provided at no charge as long as a minimum
cumulative throughput of *** barrels of material is processed quarterly. In the event the throughput falls below target,
KMTEX reserves the right to charge tank rental or designate the tanks for other service.
•
The Pygas TOPS portion of the finished product must ship out within 10 calendar days after processing is
complete and the material balance has been reported. After such time KMTEX shall charge $*** per day
penalty for each day the material remains in KMTEX storage.
•
VSR FEED
❑ Processing Fee: $*** per pound of VSR Feed processed. In the event that the processing rates of a feed material are
significantly reduced due to a change in composition that directly effects processing, KMTEX reserves the right to
renegotiate the processing fee of that particular feed material.
•
Includes a *** barrel tank for overheads which must ship out within 10 calendar days after processing is complete and
the material balance has been reported. After such time KMTEX shall charge $*** per day penalty for each day the
material remains in KMTEX storage.
•
TANK RENTAL
❑ Tank rental rates to support VSR Feed processing as follows:
• $***/month for the following tanks:
❑ Pygas Feed: *** barrel tank
o VSR Feed: *** or *** barrel tank
❑VSR & Pygas Bottoms: * * * barrel tank for combined use to support Pygas and VSR Feed
❑Additional * * * gallons of storage to supplement Pygas and VSR Feed
processing
• Additional Tank rental rates as follows
processing
❑ $***/month ($***/day) for an *** barrel tank
o $***/month ($***/day) for a *** barrel tank
◦
◦
◦
$***/month ($***/day) for a *** barrel tank
$***/month ($***/day) for a *** gallon tank
$***/month ($***day) for a *** gallon tank
• GENERAL TERMS:
Page 2 of 2 Page 2 of 2 CONFIDENTIAL TREATMENT REQUESTED BY
Vertex Energy, Inc.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
❑
KMTEX will terminal, accumulate and blend materials and charge for tank rental and
handling.
**************************************************
MATERIAL BELOW MARKED BY AN “***” HAS BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT. THIS ENTIRE EXHIBIT INCLUDING THE OMITTED CONFIDENTIAL INFORMATION HAS BEEN FILED
SEPARATELY WITH THE COMMISSION.
**************************************************
• In and out charges for additional terminalled product as follows:
•
•
$*** per tank truck of incoming unprocessed material
$*** per railcar unloaded of unprocessed material
◦
◦
◦
◦
◦
PROCESSING BY-PRODUCTS: CUSTOMER will be responsible for the expense associated with disposal of any high
flash non-hazardous water generated from processing at a cost of $***/gallon, and any low flash hazardous water
generated from processing at a cost of $***/gallon; provided, however, such disposal cost shall be limited to disposal of
water that is attributable to the water content of the Feed.
Regarding Additives
•
•
•
•
•
•
All additives being delivered to KMTEX will have to be scheduled with the KMTEX logistics department and an
unloading time assigned.
All additives will have to be labeled with CUSTOMER name on the side of the drum /
tote.
There will be a charge of *** per gallon for each additive administered with a minimum charge of $*** for each
additive.
It will be the responsibility of the CUSTOMER for the disposal of their empty drums. In the event that KMTEX
has to dispose of any drums, there will be a charge of $*** per drum.
Anytime CUSTOMER requests a nitrogen roll on a take there will be a charge of $*** per
hour.
It will be the responsibility of the CUSTOMER for the disposal of their empty drums. In the event that KMTEX
has to dispose of any drums, there will be a charge of $*** per drum.
Shipping Charges for samples and other customer requested shipments will be billed at cost plus
***%
Overtime Charges. Overtime rate is $* * * per hour with a four (4) hour minimum for overtime
services.
Charges for Late Scheduling. All truck loads must be scheduled at least a day in advance and such scheduling must be
done between the hours of 9 AM - 3 PM. Anything scheduled after these hours for next day pick up or scheduled on the
day of the pickup will result in a $*** charge per load. No trucks will automatically be “rolled over” to the next day. They
must be scheduled.
3.
Miscellaneous
All other provisions of the Processing Agreement not specifically amended herein shall remain the same and shall be in full force and
effect.
Page 3 of 3 Page 3 of 3 CONFIDENTIAL TREATMENT REQUESTED BY
Vertex Energy, Inc.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
This 3rd Amendment may be executed in any number of counterparts, each of which when so executed and delivered shall be
deemed an original, and such counterparts together shall constitute one and the same instrument.
WITNESS WHEREOF, the parties hereto have caused this Amendment to be signed by their duly authorized representative effective
on January 1, 2016.
Page 4 of 4 Page 4 of 4 CONFIDENTIAL TREATMENT REQUESTED BY
Vertex Energy, Inc.
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 (wholly-owned)
Vertex Energy Operating, LLC, a Texas Limited Liability Company (wholly-owned)(“ Vertex Operating”)
E-Source Holdings, LLC, a Texas Limited Liability Company (wholly-owned)
Vertex Refining, NV, LLC, a Nevada Limited Liability Company (wholly-owned)
Vertex Refining OH, LLC, an Ohio Limited Liability Company (wholly-owned by Vertex Operating)
Vertex Refining, LA,, LLC, a Louisiana Limited Liability Company (wholly-owned)
Vertex II, GP, LLC, a Nevada Limited Liability Company (wholly-owned)
Vertex Acquisition Sub, LLC, a Nevada Limited Liability Company (“ Vertex Acquisition”) (wholly-owned by Vertex Operating)
• Golden State Lubricant Works, LLC, a Delaware Limited Liability Company (wholly-owned)
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.
EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in (a) Registration Statement No. 333-162290 (as amended) on Form S-8; (b) Registration Statement No. 333-
197659 on Form S-8; (c) Registration Statement No. 333-207157 on Form S-8; (d) Registration Statement No. 333-197494 on Form S-3, (e) Registration
Statement No. 333-189107 on Form S-3, (f) Registration Statement No. 333-205871 on Form S-1, (g) Registration Statement No. 333-211955 on Form S-1, and
(h) Registration Statement No. 333-207156 on Form S-1 of Vertex Energy, Inc., of our report dated March 13, 2017, relating to the consolidated financial
statements which appear in this Annual Report on Form 10-K of Vertex Energy, Inc. for the year ended December 31, 2016.
/s/ Hein & Associates LLP
Houston, Texas
March 13, 2017
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
EXHIBIT 31.1
I, Benjamin P. Cowart, certify that:
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Vertex Energy, Inc.;
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;
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;
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)
(b)
(c)
(d)
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;
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;
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
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 Annual 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)
(b)
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
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 13, 2017
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.
EXHIBIT 31.2
I, Chris Carlson, certify that:
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Vertex Energy, Inc.;
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;
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;
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)
(b)
(c)
(d)
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;
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;
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
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 Annual 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)
(b)
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
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 13, 2017
By:
/s/ Chris Carlson
Chris Carlson
Chief Financial Officer
(Principal Accounting and Financial Officer)
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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, 2016, 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.
Date: March 13, 2017
By:
/s/ Benjamin P. Cowart
Benjamin P. Cowart
Chief Executive Officer
(Principal Executive Officer)
This certification accompanies this Report on Form 10-K pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent
required by such Act, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to
the extent that the Company specifically incorporates it by reference. A signed original of this written statement required by Section 906 has been provided to the
Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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, 2016, 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.
Date: March 13, 2017
By:
/s/ Chris Carlson
Chris Carlson
Chief Financial Officer
(Principal Accounting and Financial Officer)
This certification accompanies this Report on Form 10-K pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent
required by such Act, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to
the extent that the Company specifically incorporates it by reference. A signed original of this written statement required by Section 906 has been provided to the
Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.