SECURITIES & EXCHANGE COMMISSION EDGAR FILING
Vertex Energy Inc.
Form: 10-K
Date Filed: 2020-03-04
Corporate Issuer CIK: 890447
© Copyright 2020, 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, 2019
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
Trading Symbols(s)
Name of each exchange on which registered
VTNR
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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). Yes ☑ No ❑
Indicate by check mark whether the registrant is a large accelerated filer, an 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 ☑
Emerging growth ❑
Accelerated filer ❑
Smaller reporting company ☑
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ❑
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.
Yes ❑ No ☑
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 $48,536,718.
State the number of shares of the issuer’s common stock outstanding, as of the latest practicable dat e: 45,554,841 shares of common stock issued and
outstanding as of March 3, 2020.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement relating to its 2020 annual meeting of shareholders (the “ 2020 Proxy Statement”) are incorporated by
reference into Part III of this Annual Report on Form 10-K where indicated. The 2020 Proxy Statement will be filed with the U.S. Securities and Exchange
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Commission within 120 days after the end of the fiscal year to which this report relates.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2019
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
Item 16.
Form 10-K Summary
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
PART I
This Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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;
risks associated with our outstanding preferred stock, including redemption obligations in connection therewith, restrictive covenants and our ability to
redeem such securities when required pursuant to the terms of such securities and applicable law;
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, including IMO 2020 (defined below);
changes in environmental and other laws and regulations and risks associated with such laws and regulations;
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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economic downturns both in the United States and globally;
risk of increased regulation of our operations and products;
negative publicity and public opposition to our operations;
disruptions in the infrastructure that we and our partners rely on;
an inability to identify attractive acquisition opportunities and successfully negotiate acquisition terms;
our ability to effectively integrate acquired assets, companies, employees or businesses;
liabilities associated with acquired companies, assets or businesses;
interruptions at our facilities;
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:
“Base Oil” means the lubrication grade oils initially produced from refining crude oil (mineral base oil) or through chemical synthesis (synthetic
base oil). In general, only 1% to 2% of a barrel of crude oil is suitable for refining into base oil. The majority of the barrel is used to produce gasoline and
other hydrocarbons;
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“Cutterstock” means fuel oil used as a blending agent added to other fuels. For example, to lower viscosity;
“Crack” means breaking apart crude oil into its component products, including gases like propane, heating fuel, gasoline, light distillates like jet
fuel, intermediate distillates like diesel fuel and heavy distillates like grease;
"Exchange Act" refers to the Securities Exchange Act of 1934, as amended;
"Feedstock” means a product or a combination of products derived from crude oil and destined for further processing in the refining or re-refining
industries. It is transformed into one or more components and/or finished products;
“Gasoline Blendstock” means naphthas and various distillate products used for blending or compounding into finished motor gasoline. These
components can include reformulated gasoline blendstock for oxygenate blending (RBOB) but exclude oxygenates (alcohols and ethers), butane, and
pentanes (an organic compound with properties similar to a butane);
“Hydrotreating” means the process of reacting oil fractions with hydrogen in the presence of a catalyst to produce high-value clean products;
“MDO” means marine diesel oil, which is a type of fuel oil and is a blend of gasoil and heavy fuel oil, with less gasoil than intermediate fuel oil
used in the maritime field;
“Naphthas” means any of various volatile, highly flammable liquid hydrocarbon mixtures used chiefly as solvents and diluents and as raw
materials for conversion to gasoline;
“Pygas” means pyrolysis gasoline, an aromatics-rich gasoline stream produced in sizeable quantities by an ethylene plant. These plants are
designed to crack a number of feedstocks, including ethane, propane, naphtha, and gasoil. Pygas can serve as a high-octane blendstock for motor
gasoline or as a feedstock for an aromatics extraction unit;
"SEC" or the " Commission" refers to the United States Securities and Exchange Commission;
"Securities Act" refers to the Securities Act of 1933, as amended; and
"VGO" refers to Vacuum Gas Oil (also known as cat feed) - a feedstock for a fluid catalytic cracker typically found in a crude oil refinery and used
to make gasoline No. 2 oil and other byproducts.
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. 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 at
http://www.sec.gov. Our internet address is www.vertexnergy.com. Information on our website is not part of this Report, and we do not desire to incorporate by
reference such information herein. Copies of documents filed by us with the SEC are also available from us without charge, upon oral or written request to our
Secretary, who can be contacted at the address and telephone number set forth on the cover page of this Report.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Item 1. Business
Corporate History:
We were 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”, where it has continued
to trade.
Prior Material Acquisitions and Transactions
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”), is a generator solutions company for the recycling and collection of used oil and oil-related residual materials from large regional and national
customers throughout the U.S. and Canada, 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 at the time of the acquisition. Additionally, Chris Carlson, our Chief Financial Officer, owned a 10% interest in Holdings at the time of
the acquisition.
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 leased and operated 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 segment. As of December 31, 2019 and 2018, E-Source is no longer in operations and we no
longer undertake dismantling, demolition, decommission and marine salvage services.
In May, 2014, we acquired certain of the assets of Omega Refining, LLC (“ 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”) 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. The assets included Omega’s Marrero, Louisiana plant which
produces vacuum gas oil (VGO) and a Bango, Nevada plant which produces base lubricating oils. 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 segment. Bango Refining operations were
sold in January 2016.
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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, the ownership of 65% of which was transferred to Tensile in connection with the Heartland SPV
(discussed below under “Recent Material Transactions ”), effective January 1, 2020, used oil storage and transfer facilities located in Columbus, Zanesville and
Norwalk, Ohio, 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 segment.
Recent Material Transactions:
Myrtle Grove Share Purchase and Subscription Agreement
On July 26, 2019 (the “MG Closing Date”), Vertex Refining Myrtle Grove LLC, a Delaware limited liability company, which entity was formed as a special
purpose vehicle in connection with the transactions, described in greater detail below (“MG SPV”), Vertex Operating, Tensile-Myrtle Grove Acquisition
Corporation (“Tensile-MG”), an affiliate of Tensile Capital Partners Master Fund LP, an investment fund based in San Francisco, California (“ Tensile”), and solely
for the purposes of the MG Guaranty (defined below), the Company, entered into and closed the transactions contemplated by a Share Purchase and
Subscription Agreement (the “MG Share Purchase”).
Prior to entering into the MG Share Purchase, Vertex Operating’s wholly-owned subsidiary, Vertex Refining LA, LLC, (“ Vertex LA”), transferred all of the
operating assets owned by it and related to the planned development of the MG Refinery (as defined below), which the parties agreed had a fair market value of
$22,666,667, to MG SPV in consideration for 21,667 Class A Units and 1,000 Class B Units of MG SPV, which units were distributed to Vertex Operating. At the
closing of the MG Share Purchase (on the MG Closing Date), Vertex Operating sold 1,000 of the Class B Units to Tensile-MG in consideration of the payment to
it of $1 million by Tensile-MG, and Tensile-MG purchased an additional 3,000 Class B Units directly from MG SPV for $3 million (less Tensile’s fees and
expenses incurred in connection with the transaction, not to exceed $850,000).
As a result of the transaction, Tensile, through Tensile-MG, acquired an approximate 15.58% ownership interest in MG SPV, which in turn now owns the
Company’s former Belle Chasse, Louisiana, re-refining complex (the “MG Refinery”).
We were required to use all proceeds we received from the sale of the Class B Units to pay down an equal amount of indebtedness then owing under
our EBC Credit Agreement and Revolving Credit Agreement, defined and described below under “Part II” - “Item 8. Financial Statements and Supplementary
Data” - “Note 9. Line of Credit and Long-Term Debt ” (collectively, the “Credit Agreements”), which amount we have paid to date.
MG SPV Limited Liability Company Agreement
As discussed above, after the consummation of the transactions set forth in the MG Share Purchase, MG SPV is owned 84.42% by Vertex Operating
and 15.58% by Tensile-MG. The Class B Units held by Tensile-MG are convertible into Class A Units at the option of Tensile-MG, as provided in the Limited
Liability Company Agreement of MG SPV dated July 25, 2019 (the “MG Company Agreement”), based on a conversion price (initially one-for-one) which may be
reduced from time to time if new Units of MG SPV are issued, and automatically convert into Series A Units upon certain events described in the MG Company
Agreement.
Additionally, the Class B Unit holders may force MG SPV to redeem the outstanding Class B Units at any time on or after the earlier of (a) July 26, 2024
and (ii) the occurrence of an MG Triggering Event (defined below)(an “MG Redemption”). The cash purchase price for such redeemed Class B Units is the
greater of (y) the fair market value of such units (without discount for illiquidity, minority status or otherwise) as determined by a qualified third party agreed to in
writing by a majority of the holders seeking an MG Redemption and Vertex Operating (provided that Vertex Operating still owns Class A Units on such date) and
(z) the original per-unit price for such Class B Units plus fifty percent (50%) of the aggregate capital invested by the Class B Unit holders through such MG
Redemption date. “MG Triggering Events” mean (a) any dissolution, winding up or liquidation of the Company, Vertex Operating or any significant subsidiary of
Vertex Operating, (b) any sale, lease, license or disposition of any material assets of the Company, Vertex Operating or any significant subsidiary of Vertex
Operating, (c) any transaction or series of related transactions (whether by merger, exchange, contribution, recapitalization, consolidation, reorganization,
combination
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or otherwise) involving the Company, Vertex Operating or any significant subsidiary of Vertex Operating, the result of which is that the holders of the voting
securities of the relevant entity as of the MG Closing Date are no longer the beneficial owners, in the aggregate, after giving effect to such transaction or series
of transactions, directly or indirectly, of more than fifty percent (50%) of the voting power of the outstanding voting securities of the entity, subject to certain other
requirements set forth in the MG Company Agreement, (d) the failure of Vertex Operating to operate MG SPV in good faith with appropriate resources, or (e) the
material failure of the Company and its affiliates to comply with the terms of the contribution agreement, whereby the Company contributed assets and
operations to MG SPV.
Distributions of available cash of MG SPV pursuant to the MG Company Agreement (including pursuant to liquidations of MG SPV), subject to certain
exemptions and exemptions set forth therein, are to be made (a) first, to the holders of the Class B Units, in an amount equal to the greater of (A) the aggregate
unpaid “Class B Yield” (equal to an annual return of 22.5% per annum) and (B) an amount equal to fifty percent (50%) of the aggregate capital invested by the
Class B Unit holders (initially Tensile-MG)(such aggregate capital invested by the Class B Unit holders, the “MG Invested Capital”, which totals $3 million as of
the Closing Date), less prior distributions (the greater amount of (A) and (B), the “Class B Priority Distributions”); (b) second, the Class B Unitholders, together as
a separate and distinct class, are entitled to receive an amount equal to the aggregate MG Invested Capital; (c) third, the Class A Unitholders (other than Class A
Unitholders which received Class A Units upon conversion of Class B Units), together as a separate and distinct class, are entitled to receive all or a portion of
any distribution equal to the sum of all distributions made under sections (a) and (b) above; and (d) fourth, to the holders of Units who are eligible to receive such
distributions in proportion to the number of Units held by such holders
On or after July 26, 2022, the Company or any of its subsidiaries, may elect to purchase all of the outstanding units of MG SPV held by Tensile-MG (or
any assignee of Tensile-MG) as discussed in the MG Company Agreement.
Right of First Offer Letter Agreement
On the MG Closing Date, Tensile-MG, Vertex Operating and the Company entered into a right of first offer letter agreement (the “ ROFO Agreement”),
whereby we agreed that if we, at any time, propose to issue, sell, transfer, assign, pledge, encumber or otherwise directly or indirectly dispose of any equity or
debt securities of (x) MG SPV and/or (y) Cedar Marine Terminals, L.P., or any other entity formed or designated to operate the Cedar Marine Terminal in
Baytown, Texas, we would provide Tensile-MG written notice of such, and Tensile-MG would have thirty days to purchase the amount of securities offered on
terms at least as favorable as those in the original proposal. The rights under the ROFO Agreement continue to apply until such time, if ever, as Tensile-MG has
acquired $50 million of securities pursuant to the terms thereof.
Subscription Agreement; Common Stock Purchase Warrant and Registration Rights and Lock-Up Agreement
On the MG Closing Date, and as a required term of the closing of the MG Share Purchase, Tensile entered into a Subscription Agreement dated July 25,
2019, in favor of the Company (the “Subscription Agreement”), pursuant to which, on the MG Closing Date, it subscribed to purchase (a) 1,500,000 shares of our
common stock (the “Tensile Shares”), and (b) warrants to purchase 1,500,000 shares of our common stock with an exercise price of $2.25 per share and a term
of ten years, which were documented by a Common Stock Purchase Warrant (the “Warrants” and the shares of common stock issuable upon exercise thereof,
the “Warrant Shares ”) in consideration for $2.22 million or $1.48 per share and warrant.
Letter Agreement and Heartland Option
On the MG Closing Date, Tensile-Heartland Acquisition Corporation (“ Tensile-Heartland”), an affiliate of Tensile, Vertex Operating and the Company
entered into a letter agreement, whereby the Company and Vertex Operating provided Tensile an option (the “Heartland Option”), exercisable at any time prior to
June 30, 2020, to the extent certain pilot studies to be conducted by MG SPV meet the standards of Tensile-Heartland, in its sole discretion, or the outcome of
such studies are waived by Tensile-Heartland, to execute and close the transactions contemplated by a Share Purchase and Subscription Agreement between
the parties and HPRM LLC, which are described below. Tensile-Heartland subsequently exercised the Heartland Option as discussed below.
Heads of Agreement
On January 10, 2020, Vertex Operating entered into a Heads of Agreement (the “ Heads of Agreement”) with Bunker One (USA) Inc., which is owned by
Bunker Holding, a Danish holding company (“Bunker One”). Pursuant to the Heads of Agreement, the Company and Bunker One agreed to form a joint decision-
making body (the “JDMB”) to focus on strategic matters related to the overall cooperation of the parties and to establish rules and procedures for identifying and
undertaking joint projects. The JDMB has six members, three each from the Company and Bunker One.
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The goal of the parties, pursuant to the Heads of Agreement and the JDMB, is to jointly develop and acquire direct or indirect equity or equity-related
interests in projects and companies in the marine fuel sector in North America, with Bunker One focusing on opportunities related to the supply and optimization
of marine fuels or components and the Company focusing on business opportunities relating to refining of bunker fuels.
For each project that the parties agree to pursue, the parties will enter into a form of Co-Operation and Joint Supply and Marketing Agreement (each a
“Co-Operation JSMA”). The principal objective of each such Co-Operation JSMA will be the expansion of the business of each party by cooperating in the
sourcing, storing, transportation, marketing and selling of products, where: (a) Vertex is primarily responsible for the sourcing and storing of the product (bunker
fuels); (b) Bunker One is primarily responsible for the transporting, blending, marketing, selling and delivering of the product (bunker fuels); (c) Bunker One is
responsible for the risk management/exposure (e.g. hedging) of the bunker fuels; and (d) Bunker One is the exclusive seller of the product to third parties.
The Heads of Agreement also allows for certain projects outside of the scope of Co-Operation JSMA’s which will be subject to separate Authorization for
Expenditures agreed to by the JDMB.
The Heads of Agreement has a term of ten years, beginning effective on January 1, 2020, and continuing through April 30, 2029, provided that the
agreement extends for additional five year periods thereafter unless either party provides the other at least 120 days’ notice of non-renewal before any such
automatic renewal date. The agreement can also be terminated by either party upon an event of default (as described in the Heads of Agreement), subject to
required thirty days’ notice of such event of default and the opportunity for the breaching party to cure. The Heads of Agreement contains standard and
customary events of default, including failure to pay amounts when due, failure to comply with the terms of the agreement, insolvency and the occurrence of a
Change of Control, each subject to the terms of the agreement. A Change of Control is defined in the agreement as any party (a) engaged in the bunkering
business (i.e., the supplying of fuel used by ships), as to Bunker One, or (b) engaged in the refining business, as to Vertex, obtaining control of such applicable
party by way of any transaction or series of transactions.
The Heads of Agreement also contains a right of first refusal provision, whereby if at any time Bunker One, or any of its U.S. affiliates (each a “ Bunker
One Party”), proposes to issue, sell, transfer, assign, or otherwise directly or indirectly dispose of (x) all or any substantial portion of its bunkering business in the
United States, or, if mutually agreed, outside of the United States and/or (y) the controlling equity interests in any corporation, limited liability company or
partnership that owns all or any substantial portion of the bunkering business, held by such Bunker One Party for value, the Bunker One Party is required to
provide the Company written notice of such event and the Company is provided the right to make an offer to purchase such entity/assets, from such Bunker One
Party, subject to the terms of the Heads of Agreement.
Additionally, under the Heads of Agreement, at any time Bunker One determines to extend its existing bunkering business to any port in North America
that is not served by Bunker One as of August 1, 2019, Bunker One is required to extend to the Company the right to elect to expand the terms and conditions of
the Heads of Agreement to include any such new port.
Finally, under the Heads of Agreement, if at any time the Company acquires a supply of material that the Company intends to sell in Texas, Louisiana or
Alabama and that is suitable for use in Bunker One’s bunkering business in such area from a third party, or produces additional material for sale in such area, the
Company is required to provide Bunker One the right to purchase such supply/material pursuant to the terms and conditions of the Heads of Agreement.
JSMA
Also on January 10, 2020, Vertex Operating entered into a Joint Supply and Marketing Agreement (the “ JSMA”), with Bunker One. The JSMA is effective
as of May 1, 2020, and provides for Bunker One to acquire 100% of the production from the Company’s Marrero, Louisiana re-refining facility (which produces
approximately 100,000 barrels per month of a bunker suitable fuel for offshore use and use as a marine vessel’s propulsion system (“Bunker Fuel”)) at the
arithmetic mean of Platts #2 USGC Pipe and Platt’s ULSD USGC Waterborne on agreed pricing days less an agreed upon discount, adjusted every three
months.
Pursuant to the JSMA, the parties agreed to the percentages pursuant to which net profit will be split between the parties, relating to the sale of such
Bunker Fuel by Bunker One, which is to be sold in Texas, Louisiana, Alabama and areas immediately adjacent thereto if mutually agreed (collectively, the “Area”).
Pursuant to the JSMA, (i) the Company is primarily responsible for the sourcing and storing of the feedstock which is used to produce the Bunker Fuel,
(ii) Bunker One is primarily responsible for the transporting, blending, marketing, selling and delivering of the Bunker Fuel, (iii) Bunker One is responsible for the
risk management/exposure (e.g. hedging) of the Bunker Fuel, and (iv) Bunker One is the exclusive seller of the Bunker Fuel to third parties.
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The Bunker Fuel is meant for blending by Bunker One into other products for the purpose of being transformed into bunker suitable fuel for a marine
vessel’s propulsion system and/or marketable wholesale products in various other markets for sale by Bunker One to customers in the Area.
Pursuant to the JSMA, the Company agreed that during the term of the agreement, neither the Company, nor any affiliate of the Company, would sell
any Bunker Fuel to any customers for their use as bunker fuel other than pursuant to the terms of the Agreement.
Payment for the Bunker Fuel is required to be made by Bunker One within three days after invoiced by the Company, and at the end of each three
months during the term of the agreement, Bunker One is required to provide a detailed accounting to the Company setting forth the consideration due to the
Company and the calculation of such amounts. The agreement also provides for a yearly accounting by Bunker One and true up of amounts paid and due
throughout such year.
The JSMA has a term from May 1, 2020 to April 30, 2029, provided that the term is automatically renewable for additional five year periods thereafter
unless either party provides the other at least 120 days prior written notice of non-renewal, prior to any automatic renewal date. The agreement can also be
terminated by either party upon an event of default (as described in the JSMA), subject to required ten days’ notice of such event of default and the opportunity
for the breaching party to cure. The Heads of Agreement contains standard and customary events of default, including failure to pay amounts when due, failure
to comply with the terms of the agreement and insolvency, each subject to the terms of the agreement. In the event that the individual or group of individuals who
ultimately own or control each party or such party’s parent as of May 1, 2020 no longer has the right or ability to control or cause the direction of the management
and policies of such entity, the agreement can be terminated immediately by the party not subject to such change of control.
The JSMA prohibits either party from promoting activities which compete against the other party’s business in the Area for the term of the agreement and
for two years thereafter.
The JSMA also provides, during the term of such agreement, for Bunker One to be allowed to have a representative attend meetings of the Board of
Directors of the Company and the committees of the Board (in a non-voting observer capacity)(the “Board Observer Right”). The Board Observer Right was
provided partially in connection with Bunker One’s agreement to acquire up to $5 million of the Company’s securities which it did through the purchase of shares
of Series B1 Preferred Stock (which shares have since been converted into common stock) and common stock, in privately negotiated purchases, with holders of
the Company’s Series B1 Preferred Stock.
Heartland Share Purchase and Subscription Agreement
On January 17, 2020 (the “Heartland Closing Date”), the parties entered into a Share Purchase and Subscription Agreement (the “ Heartland Share
Purchase”) by and among HPRM LLC, a Delaware limited liability company, which entity was formed as a special purpose vehicle in connection with the
transactions, described in greater detail below (“Heartland SPV”), Vertex Operating, Tensile-Heartland, and solely for the purposes of the Heartland Guaranty
(defined below), the Company.
Prior to entering into the Heartland Share Purchase, the Company transferred 100% of the ownership of Vertex Refining OH, LLC, its indirect wholly-
owned subsidiary (“Vertex OH”) to Heartland SPV in consideration for 13,500 Class A Units, 13,500 Class A-1 Preferred Units and 11,300 Class B Units of
Heartland SPV and immediately thereafter contributed 248 Class B Units to Vertex Splitter, as a contribution to capital.
Vertex OH owns the Company’s Columbus, Ohio, Heartland facility, which produces a base oil product that is sold to lubricant packagers and distributors.
Pursuant to the Heartland Share Purchase, Vertex Operating sold Tensile-Heartland the 13,500 Class A Units and 13,500 Class A-1 Preferred Units of
Heartland SPV in consideration for $13.5 million. Also, on the Heartland Closing Date, Tensile-Heartland purchased 7,500 Class A Units and 7,500 Class A-1
Units in consideration for $7.5 million (less the expenses of Tensile-Heartland in connection with the transaction) directly from Heartland SPV.
We agreed to use $7 million of the amount received in connection with the sale of the Class A-1 Preferred Units to paydown amounts owed under the
Credit Agreements, and to maintain at least $350,000 of cash on our balance sheet for working capital (less amounts required to be applied to Tensile-Heartland’s
expenses associated with the transaction).
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The approximate $7.5 million purchase amount and future free cash flows from the operation of Heartland SPV are planned to be available for
investments at the Heartland facility to increase self-collections, maximize the throughput of the refinery, enhance the quality of the output and complete other
projects.
Concurrently with the closing of the transactions described above, and pursuant to the terms of the Heartland Share Purchase, the Company, through
Vertex Operating, purchased 1,000 newly issued Class A Units from MG SPV at a cost of $1,000 per unit ($1 million in aggregate).
The Heartland Share Purchase provides Tensile-Heartland an option, exercisable at its election, any time after the Heartland Closing Date, subject to the
terms of the Heartland Share Purchase, to purchase up to an additional 7,000 Class A-2 Preferred Units at a cost of $1,000 per Class A-2 Preferred Unit from
Heartland SPV.
The Heartland Share Purchase also provided for a guarantee by the Company to Tensile-Heartland of the payment obligations of Vertex Operating as set
forth in the Heartland Share Purchase (the “Heartland Guaranty”).
The Heartland Share Purchase had an effective date of January 1, 2020.
Administrative Services Agreement
Pursuant to an Administrative Services Agreement, entered into on the Heartland Closing Date, Heartland SPV engaged Vertex Operating and the
Company to provide administrative/management services and day-to-day operational management services of Heartland SPV in connection with the collection,
storage, transportation, transfer, refining, re-refining, distilling, aggregating, processing, blending, sale of used motor oil, used lubricants, wholesale lubricants,
recycled fuel oil, or related products and services such as vacuum gas oil, base oil, and asphalt flux, in consideration for a monthly fee. The Administrative
Services Agreement has a term continuing until the earlier of (a) the date terminated with the mutual consent of the parties; (b) a liquidation of Heartland SPV;
(c) a Heartland Redemption (defined below); (d) the determination of Heartland SPV to terminate following a change of control (as described in the
Administrative Services Agreement) of Heartland SPV or the Company; or (e) written notice from the non-breaching party upon the occurrence of a breach
which is not cured within the cure period set forth in the Administrative Services Agreement.
The Administrative Services Agreement also provides that in the event that Heartland SPV is unable to procure used motor-oil (“ UMO”) through its
ordinary course operations, subject to certain conditions, Vertex Operating and the Company are required to use their best efforts to sell (or cause an affiliate to
sell) UMO to Heartland SPV, at the lesser of the (i) then-current market price for UMO sold in the same geography area and (ii) price paid by such entity for such
UMO. Finally, the Administrative Services Agreement provides that in the event that the Heartland SPV is unable to procure vacuum gas oil (“VGO”) feedstock
through its ordinary course operations, subject to certain conditions, Vertex Operating and the Company are required to use their best efforts to sell (or cause an
affiliate to sell) VGO to Heartland SPV, at the lesser of the (i) then-current market price for VGO sold in the same geographic area and (ii) price paid for such
VGO.
Advisory Agreement
On the Heartland Closing Date, Heartland SPV entered into an Advisory Agreement with Tensile, pursuant to which Tensile agreed to provide advisory
and consulting services to Heartland SPV and Heartland SPV agreed to reimburse and indemnify Tensile and its representatives, in connection therewith.
Heartland Limited Liability Company Agreement
The Heartland SPV is currently owned 35% by Vertex Operating and 65% by Tensile-Heartland. The Class A Units held by Tensile-Heartland are
convertible into Class B Units as provided in the Limited Liability Company Agreement of Heartland SPV (the “Heartland Company Agreement”), based on a
conversion price (initially one-for-one) which may be reduced from time to time if new Units of Heartland SPV are issued and will automatically convert into
Series A Units upon certain events described in the Heartland Company Agreement.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The Class A-1 and A-2 Preferred Units (“ Class A Preferred Units ”), which are 100% owned by Tensile-Heartland, accrue a 22.5% per annum preferred
return subject to terms of the Heartland Company Agreement (the “Class A Yield”).
Additionally, the Class A Unit holders (common and preferred) may force Heartland SPV to redeem the outstanding Class A Units at any time on or after
the earlier of (a) January 17, 2025 and (ii) the occurrence of a Heartland Triggering Event (defined below)(a “Heartland Redemption”). The cash purchase price
for such redeemed Class A Unit will be the greater of (y) the fair market value of such units (without discount for illiquidity, minority status or otherwise) as
determined by a qualified third party agreed to in writing by a majority of the holders seeking Heartland Redemption and Vertex Operating (provided that Vertex
Operating still owns Class B Units on such date) and (z) the original per-unit price for such Class A Units plus fifty percent (50%) of the aggregate capital
invested by the Class A Unit holders through such Heartland Redemption date. “Heartland Triggering Events” include (a) any termination of the Administrative
Services Agreement pursuant to its terms and/or any material breach by us of the environmental remediation and indemnity agreement, (b) any dissolution,
winding up or liquidation of the Company, Vertex Operating or any significant subsidiary of Vertex Operating, (c) any sale, lease, license or disposition of any
material assets of the Company, Vertex Operating or any significant subsidiary of Vertex Operating, or (d) any transaction or series of related transactions
(whether by merger, exchange, contribution, recapitalization, consolidation, reorganization, combination or otherwise) involving the Company, Vertex Operating
or any significant subsidiary of Vertex Operating, the result of which is that the holders of the voting securities of the relevant entity as of the Heartland Closing
Date are no longer the beneficial owners, in the aggregate, after giving effect to such transaction or series of transactions, directly or indirectly, of more than fifty
percent (50%) of the voting power of the outstanding voting securities of the entity, subject to certain other requirements set forth in the Heartland Company
Agreement.
In the event that Heartland SPV fails to redeem such Class A Units within 180 days after a redemption is triggered, the Class A Yield is increased to 25%
until such time as such redemption is completed (with such increase being effective back to the original date of a notice of redemption). In addition, in such event,
the Class A Unit holders may cause Heartland SPV to initiate a process intended to result in a sale of Heartland SPV.
Distributions of available cash of Heartland SPV pursuant to the Heartland Company Agreement (including pursuant to liquidations of Heartland SPV),
subject to certain exceptions set forth therein, are to be made (a) first, to the holders of the Class A Preferred Units, in amount equal to the greater of (A) the
aggregate unpaid Class A Yield and (B) an amount equal to fifty percent (50%) of the aggregate capital invested by the Class A Preferred Unit holders (initially
Tensile-Heartland)(such aggregate capital invested by the Class A Preferred Unit holders, the “Heartland Invested Capital”, which totaled approximately $21
million as of the Heartland Closing Date, subject to adjustment as provided in the Heartland Share Purchase), less prior distributions (such greater amount of
(A) and (B), the “Class A Preferred Priority Distributions ”); (b) second, the Class A Preferred Unitholders, together as a separate and distinct class, are entitled to
receive an amount equal to the aggregate Heartland Invested Capital; (c) third, the Class B Unitholders (other than Class B Unitholders which received Class B
Units upon conversion of Class A Preferred Units), together as a separate and distinct class, are entitled to receive all or a portion of any distribution equal to the
sum of all distributions made under sections (a) and (b) above; and (d) fourth, to the holders of Units who are eligible to receive such distributions in proportion to
the number of Units held by such holders.
On or after January 17, 2023, the Company (through Vertex Operating) may elect to purchase all of the outstanding units of Heartland SPV held by
Tensile-Heartland at the greatest of (i) the amount of the Class A Priority Distributions and the amount of the Heartland Invested Capital, had the Class A Yield
accrued at 30% per annum (instead of the original stated 22.5% per annum), (ii) two hundred and seventy-five percent (275%) of the total Heartland Invested
Capital, and (iii) a calculation based on the greater of six (6) times the trailing twelve (12) months’ adjusted EBITDA and (B) six (6) times the next twelve
(12) months’ projected adjusted EBITDA, each as described in further detail in the Heartland Company Agreement.
Upon the occurrence of a Heartland Triggering Event (described above), the Class A Unitholders (initially Tensile-Heartland) may elect, by a majority
vote, to (a) terminate the Administrative Services Agreement and appoint new management of Heartland SPV, (b) trigger a Heartland Redemption, and/or
(c) purchase the Class B Units from the Class B Unitholders (initially Vertex Operating) at the fair market value of such units as determined by a qualified third
party agreed to in writing by the parties.
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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 segments:
(1) Black Oil,
(2) Refining and Marketing, and
(3) Recovery.
We currently provide our services in 15 states, primarily in the Gulf Coast, Midwest and Mid-Atlantic regions of the United States. For the rolling twelve
month period ending December 31, 2019, we aggregated approximately 94.1 million gallons of used motor oil and other petroleum by-product feedstocks and
managed the re-refining of approximately 77.6 million gallons of used motor oil with our proprietary TCEP, VGO and Base Oil processes.
Our Black Oil segment collects and purchases used motor oil directly from third-party generators, aggregates used motor oil from an established network
of local and regional collectors, and sells used motor oil to our customers for use as a feedstock or replacement fuel for industrial burners. We operate a refining
facility that uses our proprietary TCEP and we also utilize third-party processing facilities. TCEP’s original purpose was to re-fine used oil into marine cutterstock;
however, in the third quarter of fiscal 2015, that use ceased to be economically accretive, and instead, we operated TCEP for the purposes of pre-treating our
used motor oil feedstock prior to shipping to our facility in Marrero, Louisiana from the third quarter of fiscal 2015 to the third quarter of 2019. During the fourth
quarter of 2019, the original purpose of TCEP once again became economically viable and at that time we switched to using TCEP to re-fine used oil into marine
cutterstock. We also operate a facility in Marrero, Louisiana, which facility re-refines used motor oil and also produces VGO and owns 84.42% of an entity which
owns a re-refining complex in Belle Chasse, Louisiana, which we call our Myrtle Grove facility.
Our Refining and Marketing segment aggregates and manages the re-refinement of used motor oil and other petroleum by-products and sells the re-
refined products to end customers.
Our Recovery segment includes a generator solutions company for the proper recovery and management of hydrocarbon streams as well as metals.
Black Oil Segment
Our Black Oil segment is engaged in operations across the entire used motor oil recycling value chain including collection, aggregation, transportation,
storage, refinement, and sales of aggregated feedstock and re-refined products to end users. We collect and purchase used oil directly from generators such as
oil change service stations, automotive repair shops, manufacturing facilities, petroleum refineries, and petrochemical manufacturing operations. We own a fleet
of 41 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 30 transportation trucks and more than 80
aboveground storage tanks with over 8.6 million gallons of storage capacity. These assets are used by both the Black Oil segment and the Refining and
Marketing segment. 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 have historically used our proprietary TCEP technology to re-refine used oil into marine fuel
cutterstock and a higher-value feedstock for further processing (as discussed above, between the third quarter of fiscal 2015 and the fourth quarter of 2019, we
utilized TCEP to pre-treat our used motor oil feedstock prior to shipping to our facility in Marrero, Louisiana; but did not operate our TCEP for the purpose of
producing finished cutterstock, due to market conditions). During the fourth quarter of 2019, we once again began using TCEP to re-refine used oil into marine
fuel cutterstock. 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),
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
the ownership of 65% of which was transferred to Tensile in connection with the Heartland SPV (discussed above), effective January 1, 2020, we produce a
base oil product that is sold to lubricant packagers and distributors.
Refining and Marketing Segment
Our Refining and Marketing segment is engaged in the aggregation of feedstock, re-refining it into higher value end products, and selling these
products to our customers, as well as related transportation and storage activities. We aggregate a diverse mix of feedstocks including used motor oil, petroleum
distillates, transmix and other off-specification chemical products. These feedstock streams are purchased from pipeline operators, refineries, chemical
processing facilities and third-party providers, and are also transferred from our Black Oil segment. 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 Segment
The Recovery segment is a generator solutions company for the proper recovery and management of hydrocarbon streams. The Company (through this
segment) owns and operates a fleet of trucks and heavy equipment used for processing, shipping and handling of reusable process equipment and other scrap
commodities.
Thermal Chemical Extraction Process
We own the intellectual property for our patented TCEP. TCEP is a technology which utilizes thermal and chemical dynamics to extract impurities from
used oil which increases the value of the feedstock. We intend to continue to develop our TCEP technology and design with the goal of producing additional re-
refined products, including lubricating base oil.
TCEP differs from conventional re-refining technologies, such as vacuum distillation and hydrotreatment, by relying more heavily on chemical processes
to remove impurities rather than temperature and pressure. Therefore, the capital requirements to build a TCEP plant are typically much less than a traditional re-
refinery because large feed heaters, vacuum distillation columns, and a hydrotreating unit are not required. The end product currently produced by TCEP is used
as fuel oil cutterstock. Conventional re-refineries produce lubricating base oils or product grades slightly lower than base oil that can be used as industrial fuels or
transportation fuel blendstocks.
We currently estimate the cost to construct a new, fully-functional, commercial facility using our TCEP technology, with annual processing capacity of
between 25 and 50 million gallons at another location would be approximately $10 - $15 million, which could fluctuate based on throughput capacity. The facility
infrastructure would require additional capitalized expenditures which would depend on the location and site specifics of the facility. From the third quarter of 2015
to the fourth quarter of 2019, we utilized TCEP to pre-treat our used motor oil feedstocks prior to shipping to our facility in Marrero, Louisiana; however, beginning
in the fourth quarter of 2019, we once again began using TCEP for the purpose of producing finished cutterstock. We have no current plans to construct any
other TCEP facilities at this time. Our TCEP technology converts feedstock into a low sulfur marine fuel that can be sold into the new 0.5% low sulfur marine fuel
specification mandated under International Maritime Organization (IMO) rules which went into effect on January 1, 2020.
Organizational Structure
The following chart reflects our current organization structure, including significant subsidiaries (all of which are wholly-owned, except as discussed
below):
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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 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 typically used: (a) as an industrial burner oil, where the used oil is dewatered, filtered and demineralized for use in industrial
burners; (b) as hydraulic oil; (c) as bitumen based products (for road surfacing and roofing); (d) as an additive in manufactured products; or (e) as a re-refined
base oil for use as a lubricant, hydraulic or transformer oil - which is how the Company uses such used oil. 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
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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 (per the EPA), 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 also believe that each year the U.S. generates 425
million used automotive oil filters containing 160,000 tons of iron units and 18 million gallons of oil (per data provided by the Steel Recycling Institute). 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 2018 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 $0.00 to
$0.20 per gallon (which is required to be paid to acquire such used oil), the approximate market price of intermediate re-refined products ranges from $0.75 to
$1.35 per gallon, and the approximate price for lubricating base oil ranges from $2.00 to $2.50 per gallon, representing a U.S. market size of approximately $1.0 -
$1.75 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.
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.
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Our proprietary TCEP technology produces a fuel oil cutterstock for the fuel oil market or a refining feedstock. We believe 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 20 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 potential
future implementation of TCEP (assuming favorable market conditions). We also intend to diversify our revenue by acquiring complementary recycling service
businesses, refining assets and technologies, and other 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.
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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. From the third quarter of 2015 to the fourth quarter of 2019, we utilized TCEP to pre-treat our used motor oil feedstocks prior to
shipping to our facility in Marrero, Louisiana; however, beginning in the fourth quarter of 2019, we once again began using TCEP for the purpose of producing
finished cutterstock. 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 six 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.
Scrap Metal(s)
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Consists of recoverable ferrous and non-ferrous recyclable metals from manufacturing and consumption. Scrap metal can be recovered from pipes, barges,
boats, building supplies, surplus equipment, tanks, and other items consisting of metal composition. These materials are segregated, processed, cut-up and sent
back to a steel mill for re-purposing.
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 segment 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 segment 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 segment 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.
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 five (5) 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
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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. As the Tolling Agreement, as amended, was not terminated by either party within 90 days of
December 31, 2019, the term of the Tolling Agreement automatically extended for an additional one (1) year period through December 31, 2020, and such
agreement can be extended for up to four (4) additional one (1) year extensions. Notwithstanding such automatic extension, as of the date of this filing, we are
negotiating the terms of a further extension/renewal.
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
On January 29, 2016, we (through Vertex Operating) and Safety-Kleen Systems, Inc. (“ Safety-Kleen”) entered into a Swap Agreement (the “ Swap
Agreement”). The Swap Agreement has a term of five years, beginning January 29, 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 Safety-Kleen's plant in Nevada 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 on January 29, 2016 (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. (a
wholly-owned subsidiary of Clean Harbors, Inc.), Rio Energy, Inc., Heritage-Crystal Clean, Inc., and Origin (formerly Flex Oil Service, LLC). These competitors
actively seek to purchase feedstock from local, regional and industrial collectors, refineries, pipelines and other sources. Competition for these feedstocks may
result in increasing prices to obtain used motor oil and transmix feedstocks critical to the success of our business. In order to
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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 225 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 original conduct on certain defined persons, including current and prior
owners or operators of a site where a release of hazardous
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substances occurred and entities that disposed or arranged for the disposal of the hazardous substances found at the site. Under CERCLA, these “
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.
responsible
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.
A new regulation primarily impacting our marine bunker fuel production is known as “IMO 2020”. On January 1, 2020, the International Maritime
Organization (the "IMO") implemented a new regulation for a 0.50% global sulphur cap for marine fuels. Under the new global cap, ships that traverse the oceans
will be required to use marine fuels with a sulphur content of no more than 0.50%, versus the prior limit of 3.50%, in an effort to reduce the amount of sulphur
oxide and decrease pollution and greenhouse gas emissions from the global shipping fleet.
There are several variables around this regulatory change that are not yet clear, including anticipated levels of compliance and enforcement. However, it
is expected that the implementation of IMO 2020 will result in a significant increase in near-term demand for a broad range of low sulfur distillates including
diesel, marine gas oil, marine diesel oil and VGO among others. There is uncertainty about the global refinery industry’s ability to meet that spike in demand,
which could have substantial consequences for the pricing of those products, particularly VGO. The price of VGO typically has a direct impact on the pricing
and/or levels of production of base oil. Changes in the marine fuel market as a result of IMO 2020 are also expected to affect the availability of used motor oil,
which today is frequently used in the marine market and some of which may be displaced as a result of this new rule.
Our Marrero facility is already producing and selling IMO 2020 compliant bunker fuel.
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 are exposed to market risks related to the volatility in the price of crude oil, No. 6 Fuel Oil and refined petroleum products. To reduce
the impact of price volatility on our results of operations and cash flows, we use commodity derivative instruments, such as futures and options. Our positions in
commodity derivative instruments are monitored and managed on a daily basis to ensure compliance with our stated risk management policy that has been
approved by our board of directors.
We primarily use commodity derivative instruments as economic hedges, which are not designated as hedging instruments, and we use fair value and
cash flow hedges from time to time.
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Our objectives for holding economic hedges are to (i) manage price volatility in certain feedstock and refined petroleum product inventories and fixed-
price purchasing, and (ii) lock in the price of forecasted feedstock, refined petroleum product, and refined petroleum product sales at existing market prices.
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.
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 four patents registered with the U.S. Patent and Trademark Office:
“System For Making A Usable Hydrocarbon Product From Used Oil” (#8,613,838), which was granted on December 24, 2013.
“Method for Making a Usable Hydrocarbon Product From Used Oil ” (#8,398,847), which was granted on March 19, 2013.
“System for producing an American Petroleum Institute Standards Group III Base Stock from vacuum gas oil ” (#10,421,916), which was granted on
September 24, 2019.
“Method for producing an American petroleum institute standards group III base stock from vacuum gas oil ” (#10,287,515), which was granted on May
14, 2019.
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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.
RISKS RELATING TO OUR OUTSTANDING CREDIT FACILITIES,
DEBT AND RECEIVABLES, AND FINANCIAL STATEMENTS
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 or refinance our existing debt to meet the requirements of the terms and conditions of our Credit Agreements,
which amounts totaling approximately $16.6 million as of December 31, 2019, come due on February 1, 2021. We may also need to raise additional funds in the
future to fund acquisitions. If we raise additional funds in the future, by issuing equity securities, dilution to existing stockholders will result, and such securities
may have rights, preferences and privileges senior to those of our common stock and preferred stock. If funding is insufficient at any time in the future and we are
unable to generate sufficient revenue from new business arrangements, to repay our outstanding debts, complete planned
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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 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, 2019, we owed approximately $12.6 million in accounts payable and
accrued expenses. As of December 31, 2019, we owed $13.3 million under the EBC Credit Agreement and $3.3 million under the Revolving Credit Agreement
(each defined and described below under “Part II. - Item 7.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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”).
Our substantial indebtedness could have important consequences and significant effects on our business. For example, it could:
increase our vulnerability to adverse changes in general economic, industry and competitive conditions;
require us to dedicate a substantial portion of our cash flow from operations to make payments on our indebtedness, thereby reducing the availability of
our cash flow to fund working capital, capital expenditures and other general corporate purposes;
restrict us from taking advantage of business opportunities;
•
•
•
• make it more difficult to satisfy our financial obligations;
•
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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:
•
•
incur or guarantee additional indebtedness;
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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•
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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;
redeem or repurchase shares of our stock, including our outstanding Series B and B1 Preferred Stock; and
engage in transactions with affiliates.
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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 $2.0 million of borrowing availability under the Revolving Credit
Agreement at any time.
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.
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
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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.
A decline in expected profitability of the Company or any of our business segments could result in the impairment of assets and other long-lived
assets, including goodwill.
We hold material amounts of long-lived assets on our balance sheet. A decline in expected profitability of one of our operating segments or a decline in
the global economy, could call into question the recoverability of our related goodwill, other long-lived tangible and intangible assets, and require us to write down
or write off these assets. Such an occurrence could have a material adverse effect on our annual results of operations and financial position.
Changes in interest rates could adversely affect our earnings and/or cash flows.
Changes in interest rates could have a material adverse impact on our earnings and cash flows. Because the majority of our notes payable have variable
interest rates, our business results are subject to fluctuations in interest rates. Additionally, our Credit Agreements bear interest at variable rates that use LIBOR
as a benchmark for establishing the interest rate. LIBOR is the subject of recent proposals for reform. On July 27, 2017, the United Kingdom’s Financial Conduct
Authority announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. These reforms may cause LIBOR to cease to exist,
new methods of calculating LIBOR to be established or the establishment of an alternative reference rate(s). These consequences cannot be entirely predicted
and could have an adverse impact on the market value for or value of LIBOR-linked securities, loans, and other financial obligations or extensions of credit held
by or due to us. Changes in market interest rates may influence our financing costs, returns on financial investments and the valuation of derivative contracts and
could reduce our earnings and cash flows.
General Risks
RISKS RELATING TO OUR OPERATIONS, BUSINESS AND INDUSTRY
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The price of oil and fluctuations in oil prices may have a negative effect on our results of operations.
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 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.
From the third quarter of 2015 to the fourth quarter of 2019, we utilized TCEP to pre-treat our used motor oil feedstocks prior to shipping to our facility in
Marrero, Louisiana; however, beginning in the fourth quarter of 2019, we once again began using TCEP for the purpose of producing finished cutterstock. When
oil prices are low we anticipate using TCEP only to pre-treat our used motor oil feedstocks prior to shipping them to our facility in Marrero, Louisiana, versus for its
original intended purpose, producing finished cutterstock. This is because when oil prices are low, the fixed costs of TCEP are greater than the price we can
charge for re-refined oil we can create using such technology. If oil prices decline in the future it may be inefficient to operate TCEP to re-refine oil, which may
have a negative effect on our cash flows and results of operations.
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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 obtain 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 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:
•
•
•
•
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,
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 subject to risks associated with our relationship with Bunker One.
On January 10, 2020, we entered into a Heads of Agreement and a Joint Supply and Marketing Agreement, with Bunker One (USA) Inc. Pursuant to the
Heads of Agreement, the Company and Bunker One agreed to form a joint decision-making body to focus on strategic matters related to the overall cooperation
of the parties and to establish rules and procedures for identifying and undertaking joint projects. For each project that the parties agree to pursue, the parties will
enter into a form of Co-Operation and Joint Supply and Marketing Agreement. The principal objective of each such Co-Operation JSMA will be the expansion of
the business of each party by cooperating in the sourcing, storing, transportation, marketing and selling of products, where: (a) Vertex is primarily responsible for
the sourcing and storing of the product (bunker fuels); (b) Bunker One is primarily responsible for the transporting, blending, marketing, selling and delivering of
the product (bunker fuels); (c) Bunker One is responsible for the risk management/exposure (e.g. hedging) of the bunker fuels; and (d) Bunker One is the
exclusive seller of the product to third parties. The Heads of Agreement has a term of ten years, beginning effective on January 1, 2020, and continuing through
April 30, 2029, provided that the agreement extends for additional five year periods thereafter unless either party provides the other at least 120 days’ notice of
non-renewal before any such automatic renewal date. Finally, under the agreement, if at any time the Company acquires a supply of material that the Company
intends to sell in Texas, Louisiana or Alabama and that is suitable for use in Bunker One’s bunkering business in such area from a third party, or produces
additional material for sale in such area, the
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Company is required to provide Bunker One the right to purchase such supply/material pursuant to the terms and conditions of the Heads of Agreement.
The JSMA is effective as of May 1, 2020, and provides for Bunker One to acquire 100% of the production from the Company’s Marrero, Louisiana re-
refining facility (which produces approximately 100,000 barrels per month of Bunker Fuel). Pursuant to the JSMA, the parties agreed to the percentages
pursuant to which net profit will be split between the parties, relating to the sale of such Bunker Fuel by Bunker One, which is to be sold in Texas, Louisiana,
Alabama and areas immediately adjacent thereto if mutually agreed. The JSMA has a term from May 1, 2020 to April 30, 2029, provided that the term is
automatically renewable for additional five year periods thereafter unless either party provides the other at least 120 days prior written notice of non-renewal,
prior to any automatic renewal date.
As a result of the above, Bunker One is the purchaser of the majority of the Company’s finished product from its Marrero, Louisiana re-refining facility,
which makes up approximately 40% of the Company’s revenues. Bunker One also currently owns over 5% of our outstanding common stock and has the right,
during the term of the JSMA, to have a representative attend each meeting of the Board of Directors of the Company and the committees of the board (in a non-
voting observer capacity). As such, we rely on Bunker One for a significant source of our revenues and the termination of, or material adverse change in, the
terms of our relationship, or a material adverse change to Bunker One or its operations, could temporarily affect our business, financial condition, liquidity and
results of operations. If our relationship with Bunker One is terminated, we would have to find a new purchaser of our Marrero finished products, or enter into
another similar counterparty arrangement with a third party, which we may not be able to enter into on terms that are as favorable to us, or at all. We are also
reliant on Bunker One’s ability to timely pay us amounts due under the JSMA and in the event that Bunker One is unable to pay such amounts, timely, or at all, it
could have a material adverse effect on our operating results. Due to our significant reliance on Bunker One, in the event Bunker One experiences issues in
selling our finished products, or in connection with its operations in general, it could have a material adverse effect on our business, financial condition, liquidity
and 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.
Worsening economic conditions and trends and downturns in the business cycles of the industries we serve and which provide services to
us would impact our business and operating results.
A significant portion of our customer base is comprised of companies in the chemical manufacturing and hydrocarbon recovery industries. The overall
levels of demand for our products, refining operations, and future planned re-refined oil products are driven by fluctuations in levels of end-user demand, which
depend in large part on general macroeconomic conditions in the U.S., as well as regional economic conditions. For example, many of our principal consumers
are themselves heavily dependent on general economic conditions, including the price of fuel and energy, availability of affordable credit and capital, employment
levels, interest rates, consumer confidence and housing demand. These cyclical shifts in our customers’ businesses may result in fluctuations in demand,
volumes, pricing and operating margins for our services and products.
In addition to our customers, the suppliers of our feedstock may also be affected by downturns in the economy and adverse changes in the price of
feedstock. For example, we previously experienced difficulty obtaining feedstock from our suppliers who, because of the sharp downturn in the price of oil (used
and otherwise) have seen their margins decrease substantially, which in some cases have made it uneconomical for such suppliers to purchase feedstock from
their suppliers and/or sell to us at the rates set forth in their contracts. Any similar decline in the price of oil and/or the economy in general could create a
decrease in the supply of feedstock, prevent us from maintaining our required levels of output and/or force us to seek additional suppliers of feedstock, who may
charge more than our current suppliers, and therefore adversely affect our results of operations.
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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
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.
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, 2020 (provided that, as of the date of this filing, we are negotiating the terms of
a further extension/renewal), provided that if not terminated by either party by written notice to the other, received within ninety (90) days prior to the expiration
term, the agreement automatically renews for up to four 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.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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, in the past we experienced difficulty in obtaining feedstock from our suppliers who, because of the sharp downturn in the price of oil (used
and otherwise) in 2015 and 2016, saw their margins decrease substantially, which in some cases 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.
Our reliance on small business customers causes us to be subject to the trends and downturns that impact small businesses, which could
adversely affect our business.
Our feedstock customer base is primarily composed of small businesses in the vehicle repair and manufacturing industries. The high concentration of our
feedstock customers that are small businesses exposes us to significant risk. Small businesses start, close, relocate, and are acquired and sold frequently. In
addition, small businesses are often impacted more significantly by economic recessions when compared to larger businesses. As a result, we must continually
identify new feedstock customers and expand our business with existing feedstock customers in order to sustain our growth and feedstock supply. If we
experience a rise in levels of customer turnover, it may have a negative impact on the profitability of our business.
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 and earthquakes, equipment failures, fires, explosions, oil
or other leaks, damage to or destruction of property and equipment associated therewith, environmental releases and/or damage, government regulation
changes affecting the use of such facilities, terrorist attacks, mechanical or physical failures of equipment, acts of God, or other conditions or events, could
prevent us from operating our facilities, or prevent such third parties from operating their facilities, or could force us or such third parties to shut such facilities
down for repairs, maintenance, refurbishment or upgrades for a significant period of time. In the event any of our facilities or those of third parties on which we
rely are offline for an extended period of time, it could have a material adverse effect on our results of operations and consequently the price of our securities.
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.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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 and/or government mandated use of such technologies and/or
government restrictions or quotas on the use of oil and gas, 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), government mandated use of such technologies and/or government restrictions or quotas on the use of oil and
gas that increase the use of alternative forms of energy and/or reduce the demand or market 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.
In addition to the above, we may be exposed to risks related to laws passed by governments or regulations incentivizing or mandating the use of
alternative energy sources, such as wind power and solar energy, which may reduce demand for oil and natural gas and our drilling services. Such laws,
regulations, treaties or international agreements could result in increased compliance costs or additional operating restrictions, which may have a negative impact
on our business, and could adversely affect our operations by limiting drilling opportunities.
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.
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.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
We face risks associated with global pandemics and epidemics.
Our sales volumes, and as a result, our results of operations and cash flows, significantly depend on the U.S. and to a lesser extent, worldwide demand
for oil and used oil. As a result, pandemics, epidemics, and public health crises, which effect the U.S. and the world as a whole, and which result in travel
disruptions, reductions in shipping and therefore declines in the need for oil and used oil, will harm our business and cause our operating results to suffer. For
example, in December 2019, January 2020 and February 2020, an outbreak of a new strain of coronavirus in Wuhan, China has resulted in decreased
production in China, which is one of the largest global producers and shippers of goods, and has consequently led to a decrease in global shipping. Furthermore,
risks associated with the potential spread of the new strain of coronavirus has resulted in additional declines in shipping volumes with ships from oil tankers to
container lines being turned away from ports, or held in quarantine, due to the fear of spreading the virus. The shipping segment has suffered even more as
factories have been shut down across China, the world’s largest consumer of commodities, and travel restrictions were put in place to control the spread of the
coronavirus outbreak. It is anticipated that the diminished demand for transported goods as a result of such slowdown and shutdowns will continue to weigh on
the shipping industry for months ahead. While we expect the decrease in global demand for shipping, and therefore oil and used oil, will have a negative effect on
the price of oil and used oil, and the demand for oil and used oil, and therefore, our results of operations, at this point, the extent to which the coronavirus may
impact our results is uncertain.
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, 2020, 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. 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.
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, 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
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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 executive officers, after they leave their employment with us, and subject to the non-compete terms of
their employment agreements, could negatively impact our profitability.
Although our Chief Executive Officer, Benjamin P. Cowart, our Chief Financial Officer and Secretary, Chris Carlson, and our Chief Operating Officer, John
Strickland, are prohibited from competing with us while they are employed with us and for twelve months thereafter (subject to the terms of, and exceptions set
forth in, their employment agreements with the Company), none of such individuals will be prohibited from competing with us after such twelve-month period
ends. 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. Previously, from the third
quarter of fiscal 2015, to the fourth quarter of 2019, TCEP was being used to pre-treat our used motor oil feedstock prior to shipping to our facility in Marrero,
Louisiana instead of for its originally intended purpose of producing finished cutterstock, due to market conditions. During the fourth quarter of 2019, market
conditions improved and we once again began using TCEP for its originally intended purpose of producing finished cutterstock. If conditions deteriorate in the
future we may once again switch to using TCEP to pre-treat used motor oil. 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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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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.
Due to ongoing increased concerns regarding future terrorist attacks and illegal immigration, federal, state and municipal authorities, from time to time,
implement 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.
Claims above our insurance limits, or significant increases in our insurance premiums, may reduce our profitability.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
We currently employ 57 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.
The Company’s information technology systems could suffer interruptions, failures or breaches and our business operations could be
disrupted adversely effecting results of operations and the Company’s reputation.
The Company’s information technology systems, some of which are dependent on services provided by third parties, serve an important role in the
operation of our business. These systems could be damaged or cease to function properly due to any number of causes, such as catastrophic events, power
outages, security breaches, computer viruses or cyber-based attacks.
The Company has been, and likely will continue to be, subject to computer hacking, acts of vandalism or theft, malware, computer viruses or other
malicious codes, phishing, employee error or malfeasance, catastrophes, unforeseen events or other cyber-attacks. To date, the Company has seen no material
impact on our business or operations from these attacks or events. Any future significant compromise or breach of data security, whether external or internal, or
misuse of customer, associate, supplier or Company data, could result in significant costs, lost sales, fines, lawsuits, and damage to the Company's reputation.
However, the ever-evolving threats mean the Company and its third-party service providers and vendors must continually evaluate and adapt respective systems
and processes and overall security environment, as well as those of any companies acquired. There is no guarantee that these measures will be adequate to
safeguard against all data security breaches, system compromises or misuses of data. In addition, as the regulatory environment related to information security,
data collection and use, and privacy becomes increasingly rigorous, with new and constantly changing requirements applicable to the Company's business,
compliance with those requirements could also result in additional costs.
We operate our business through many locations, and if we are unable to effectively oversee all of these locations, our business reputation
and operating results could be materially adversely affected.
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Because we operate through various different facilities located throughout the United States, we are subject to risks related to our ability to oversee these
locations. If in the future we are unable to effectively oversee our locations, our results of operations could be materially adversely affected, we could fail to
comply with environmental regulations, we could lose customers, we could lose control of inventory and other assets, and our business could be materially
adversely affected.
Increases in energy costs will affect our operating results and financial condition.
Our production costs will be dependent on the costs of the energy sources used to run our facilities and to procure feedstock. These costs are subject to
fluctuations and variations, and we may not be able to predict or control these costs. If these costs exceed our expectations, this may adversely affect our results
of operations.
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 (OPEC) 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.
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 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,
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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 has revealed deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses. Our compliance with Section
404 requires that we incur substantial accounting expense and expend significant management efforts. Moreover, if we are not able to comply with the
requirements of Section 404 in a timely manner, or if we continue to 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.
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. At December 31, 2019, the net operating loss carry-forwards reflect a reduction of approximately $33.0 million resulting
from a 382 study which was completed during 2016. 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 periods ended December 31, 2019 and 2018. 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.
We may experience adverse impacts on our reported results of operations as a result of adopting new accounting standards or interpretations.
Our implementation of and compliance with changes in accounting rules, including new accounting rules and interpretations, could adversely affect our
reported financial position or operating results or cause unanticipated fluctuations in our reported operating results in future periods.
Our consolidated financial statements, including our liabilities and statements of operations are subject to quarterly changes in our derivative
accounting of our outstanding Series B and B1 Preferred Stock and warrants.
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 is re-measured at each reporting period with changes in fair value recorded in earnings. To derive an estimate of the fair
value of these warrants, a Dynamic Black Scholes model is utilized which 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, our quoted stock prices, strike price and volatility assumptions to dynamically
adjust the payoff of the warrants in the presence of the dilution effect. As a result, our consolidated financial statements and results of operations may fluctuate
quarterly, based on factors, such as the trading value of our common stock and certain assumptions, which are outside of our control. Consequently, our liabilities
and consolidated statements of operations may vary quarterly, based on factors other than the Company’s revenues and expenses. The liabilities and accounting
line items associated with our derivative securities on our balance sheet and statement of operations are non-cash items, and the inclusion of such items in our
financial statements may materially affect the outcome of our quarterly and annual results, even though such items are non-cash and do not affect the cash we
have available for operations. Investors should take such derivative accounting matters and other non-cash items into account when comparing our quarter-to-
quarter and year-to-year operating results and financial statements.
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We have identified material weaknesses in our disclosure controls and procedures and internal control over financial reporting. If not
remediated, our failure to establish and maintain effective disclosure controls and procedures and internal control over financial reporting could
result in material misstatements in our financial statements and a failure to meet our reporting and financial obligations, each of which could have a
material adverse effect on our financial condition and the trading price of our common stock.
Maintaining effective internal control over financial reporting and effective disclosure controls and procedures are necessary for us to produce reliable
financial statements. As reported under “Part II” - “Item 9. Controls and Procedures”, as of December 31, 2019, our CEO and CFO have determined that our
disclosure controls and procedures were not effective, and such disclosure controls and procedures have not been deemed effective since approximately
September 30, 2018. Separately, management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019
and determined that such internal control over financial reporting was not effective as a result of such assessment.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis. A control deficiency
exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to
prevent or detect misstatements on a timely basis.
Maintaining effective disclosure controls and procedures and effective internal control over financial reporting are necessary for us to produce reliable
financial statements and the Company is committed to remediating its material weaknesses in such controls as promptly as possible. However, there can be no
assurance as to when these material weaknesses will be remediated or that additional material weaknesses will not arise in the future. Any failure to remediate
the material weaknesses, or the development of new material weaknesses in our internal control over financial reporting, could result in material misstatements in
our financial statements and cause us to fail to meet our reporting and financial obligations, which in turn could have a material adverse effect on our financial
condition and the trading price of our common stock, and/or result in litigation against us or our management. In addition, even if we are successful in
strengthening our controls and procedures, those controls and procedures may not be adequate to prevent or identify irregularities or facilitate the fair
presentation of our financial statements or our periodic reports filed with the SEC.
Risks Relating to Acquisitions
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 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
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•
the failure to realize efficiencies, synergies and cost savings.
We may also assume liabilities and environmental liabilities as part of acquisitions. 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 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.
If the benefits of the January 2020 Heartland transaction do not meet the expectations of the marketplace, or financial or industry analysts, the
market price of our common stock may decline.
The market price of our common stock may decline, if we are not otherwise able to achieve the perceived benefits of the January 2020 Heartland
transaction discussed above under “Part I” - “Item 1. Business” - “Recent Material Transactions ” - “Heartland Share Purchase and Subscription Agreement ” as
rapidly as, or to the extent, anticipated by the marketplace, or financial or industry analysts. Accordingly, investors may experience a loss as a result of a
decreasing stock price and we may not be able to raise future capital, if necessary, in the equity markets.
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The MG Company Agreement includes redemption rights.
The MG SPV Class B Unit holders may force MG SPV to redeem the outstanding Class B Units at any time on or after the earlier of (a) July 26, 2024
and (ii) the occurrence of an applicable triggering event. The cash purchase price for such redeemed Class B Units is the greater of (y) the fair market value of
such units (without discount for illiquidity, minority status or otherwise) as determined by a qualified third party and (z) the original per-unit price for such Class B
Units plus fifty percent (50%) of the aggregate capital invested by the Class B Unit holders through such redemption date. MG SPV may not have sufficient funds
to redeem such Class B Units on such required redemption date and/or the Company may be forced to advance funds to MG SPV to allow it to complete such
redemption, if such redemption is triggered.
Distributions of available cash of MG SPV pursuant to the MG Company Agreement (including pursuant to liquidations of MG SPV), subject to certain
exemptions and exemptions set forth therein, are to be made (a) first, to the holders of the Class B Units, in an amount equal to the greater of (A) the aggregate
unpaid “Class B Yield” (equal to an annual return of 22.5% per annum) and (B) an amount equal to fifty percent (50%) of the aggregate capital invested by the
Class B Unit holders (initially Tensile-MG)(such aggregate capital invested by the Class B Unit holders, the “MG Invested Capital”, which totals $3 million as of
the Closing Date), less prior distributions (the greater amount of (A) and (B), the “Class B Priority Distributions”); (b) second, the Class B Unitholders, together as
a separate and distinct class, are entitled to receive an amount equal to the aggregate MG Invested Capital; (c) third, the Class A Unitholders (other than Class A
Unitholders which received Class A Units upon conversion of Class B Units), together as a separate and distinct class, are entitled to receive all or a portion of
any distribution equal to the sum of all distributions made under sections (a) and (b) above; and (d) fourth, to the holders of Units who are eligible to receive such
distributions in proportion to the number of Units held by such holders
Our acquisitions may expose us to unknown liabilities.
Because we have acquired, and expect generally to acquire, all the outstanding shares of certain of our acquisition targets, our investment in those
companies are or will be subject to all of their liabilities other than their respective debts which we paid or will pay at the time of the acquisitions. If there are
unknown liabilities or other obligations, our business could be materially affected. We may also experience issues relating to internal controls over financial
reporting that could affect our ability to comply with the Sarbanes-Oxley Act, or that could affect our ability to comply with other applicable laws.
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.
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;
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•
•
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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 ACBMs, 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.
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.
In addition, mandatory fuel standards have been adopted in many jurisdictions which can be costly to implement and maintain compliance. For example,
the International Maritime Organization set January 1, 2020 as the implementation date for ships to comply with new low sulfur fuel oil requirements (“IMO 2020”).
Shipping companies may comply with this requirement by either using fuel with low sulfur content, which is more expensive than standard marine fuel, or by
upgrading vessels to provide cleaner exhaust emissions, such as by installing “scrubbers” or retrofitting vessels to be powered by liquefied natural gas (“LNG”).
The cost of compliance with these regulatory changes may be significant for shipping companies and it is uncertain how the
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availability and price of fuel globally will be affected by the implementation of the IMO 2020 regulations as refineries adjust their capacity to increase production of
compliant fuels. These and future changes to applicable standards or other more stringent requirements in the industries we serve could reduce our ability to
procure feedstocks, reduce our margins, increase our operational expenses, increase fuel prices, require us to incur additional handling costs and/or require the
expenditure of capital. To the extent these expenditures, as with all costs, are not ultimately reflected in the prices of our products or we are unable to adequately
source compliant fuels, our business and result of operations would be adversely affected. Furthermore, IMO 2020 and/or other regulations may decrease
demand for our products or force us to change the mix of products we offer.
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 several 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
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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 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.
Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “ Dodd-Frank Act”) establishes federal oversight and regulation of over-
the-counter (“OTC”) derivatives and requires the SEC and the Commodity Futures Trading Commission (the “ CFTC”) to enact further regulations affecting
derivatives, including those we use to hedge our commodity exposure. Although the CFTC and the SEC have issued final regulations in certain areas, final rules
in other areas and the scope of relevant definitions and/or exemptions still remain to be finalized.
The above regulations and rules could increase the costs to us of entering into derivatives to hedge or mitigate our commodity price exposure. If we
voluntarily or involuntarily reduce our use of derivative contracts as a result of the new requirements, we become more exposed to commodity price fluctuations,
which could adversely affect our ability to conduct our operations and/or hedge against falling prices, the result of which may mean more extreme swings in our
results of operations and ultimately a decline in the value of our securities.
We could be subject to involuntary shutdowns or be required to pay significant monetary damages or remediation costs if we are found to be
a responsible party for the improper handling or the release of hazardous substances.
As a company engaged in the sale, handling, transportation, storage, recycling and disposal of materials that are or may be classified as hazardous by
federal, state, provincial or other regulatory agencies, we face risks of liability for environmental contamination. The federal Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended, or “CERCLA” or Superfund, and similar state laws impose strict liability for clean-up costs on
current or former owners and operators of facilities that release hazardous substances into the environment, as well as on the businesses that generate those
substances or transport them. As a potentially responsible party, or “PRP,” we may be liable under CERCLA for substantial investigation and cleanup costs even
if we operate our business properly and comply with applicable federal and state laws and regulations. Liability under CERCLA may be joint and several, which
means that if we were found to be a business with responsibility for a particular CERCLA site, we could be required to pay the entire cost of the investigation and
cleanup, even though we were not the party responsible for the release of the hazardous substance and even though other companies might also be liable. Even
if we are able to identify who the other responsible parties might be, we may not be able to compel them to contribute to the remediation costs, or they might be
insolvent or unable to contribute due to lack of financial resources.
Our facilities and the facilities of our clients and third-party contractors may have generated, used, handled and/or disposed of hazardous substances and
other regulated wastes. Environmental liabilities could exist, including cleanup obligations at these facilities or at off-site locations, which could result in future
expenditures that cannot be currently quantified and which could
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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. 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.
Risks Related to Our Recovery Segment
Recovery segment customers may cancel or delay projects.
Recovery segment 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.
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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, automating 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.
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 registered 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 15.5% of our common stock (not including
shares issuable upon exercise of options and warrants held by Mr. Cowart) and approximately 13.5% 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
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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 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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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.
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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, and will be subject to the terms of our credit agreements, which currently prevent us from paying cash
dividends on, and/or redeeming, outstanding securities. As a result, only appreciation of the price of our common stock, which may not occur, will provide a return
to our stockholders.
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.
As of the date of this filing, we have (i) 4,418,250 outstanding stock options at a weighted average exercise price of $1.95 per share; (ii) 8,633,188
outstanding warrants to purchase 8,633,188 shares of common stock at a weighted average exercise price of $2.30 per share; (iii) 419,859 shares of common
stock issuable upon the conversion of our 419,859 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) 3,833,449 shares of common stock issuable upon conversion of our 3,833,449
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); and (v) 7,004,236 shares of common stock issuable upon conversion of our 7,004,236 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). For the life of the options and warrants, the holders have
the opportunity to profit from a rise in the market price of our common stock without assuming the risk of ownership. The issuance of shares upon the exercise of
outstanding securities will also dilute the ownership interests of our existing stockholders.
The availability of these shares for public resale, as well as any actual resales of these shares, could adversely affect the trading price of our common
stock. We cannot predict the size of future issuances of our common stock pursuant to the exercise of outstanding options or warrants or conversion of other
securities, or the effect, if any, that future issuances and sales of shares of our common stock may have on the market price of our common stock. Sales or
distributions of substantial amounts of our common stock (including shares issued in connection with an acquisition), or the perception that such sales could
occur, may cause the market price of our common stock to decline.
In addition, the common stock issuable upon exercise/conversion of outstanding convertible securities may represent overhang that may also adversely
affect the market price of our common stock. Overhang occurs when there is a greater supply of a company’s stock in the market than there is demand for that
stock. When this happens the price of 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 holders of our outstanding convertible securities, then
the value of our common stock will likely decrease.
We use derivative commodity instruments to attempt to hedge against fluctuating prices.
The Company utilizes derivative instruments to manage its exposure to fluctuations in the underlying commodity prices of its inventory. The Company's
management sets and implements hedging policies, including volumes, types of instruments and counterparties, to support oil prices at targeted levels and
manage its exposure to fluctuating prices. The Company’s derivative instruments consist of swap and futures arrangements for oil. In a commodity swap
agreement, if the agreed-upon published third-
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party index price (“index price”) is lower than the swap fixed price, the Company receives the difference between the index price and the swap fixed price. If the
index price is higher than the swap fixed price, the Company pays the difference. For futures arrangements, the Company receives the difference, positive or
negative, between an agreed-upon strike price and the market price. Our results of operations may be negatively affected by our derivative instruments.
The Lock-Up Agreement with Tensile includes termination rights.
We and Tensile entered into a Registration Rights and Lock-Up Agreement, pursuant to which we agreed to use commercially reasonable efforts to
register the Tensile Shares and Warrant Shares prior to July 26, 2020 and Tensile agreed to not sell any of the Tensile Shares or Warrant Shares until July 26,
2020 and to sell no more than 300,000 of such Tensile Shares and Warrant Shares in any 90 day period through July 26, 2024 (the “Volume Limitation”), each,
subject to certain exceptions set forth therein. The general restriction on selling shares, but not the Volume Limitation, terminates if our common stock is not
traded on Nasdaq or a similar market for a period of more than five consecutive trading days. Upon any termination of the lock-up pursuant to the preceding
sentence, in the event Tensile holds any Tensile Shares, Warrant Shares or any Warrants, we are required to disclose publicly all material nonpublic information
disclosed to Tensile prior to the date of such termination. The sale by Tensile of common stock into the marketplace, in the event of the termination of the terms
of the Lock-Up Agreement may result in a decrease in the then trading values of our common stock. Furthermore, the required disclosure of material nonpublic
information, if required by the terms of the Lock-Up Agreement, could have a material adverse effect on our ability to compete in our industry, require the
disclosure of proprietary and other information, and/or may cause the value of our common stock to decline in value.
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 and Series B1 Preferred Stock, which give the holders thereof a liquidation preference.
We have 50 million shares of preferred stock authorized, which includes 5 million shares of designated Series A Preferred Stock of which approximately
0.4 million shares are issued and outstanding, 10 million designated shares of Series B Preferred Stock, of which 3.8 million shares are issued and outstanding,
and 17 million designated shares of Series B1 Preferred Stock, of which 7.0 million shares are issued. 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. 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 $0.6 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 $23.0 million of the
remaining proceeds from any such transaction. 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. 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.
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We do not anticipate redeeming our Series B and B1 Preferred Stock on June 24, 2020, notwithstanding the fact that our Series B and B1
Preferred Stock is required to be redeemed on June 24, 2020, subject to the terms of the Certificate of Designations of such Preferred Stock and
applicable law, and the dividend rate of such Preferred Stock increases to 10% per annum in the event the Company is unable to complete such
redemptions.
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 $12.0 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 $10.9 million in aggregate as of the date of this filing), subject to the terms of the certificate of designations of such Series B and B1 Preferred
Stock and applicable law. The certificate of designations of the Series B and B1 Preferred Stock provide that the mandatory redemption date of the Series B and
B1 Preferred Stock is automatically extended in the event that the terms of the Company’s senior credit facility (i.e., the Credit Agreements), prohibit the
redemption of such Series B and B1 Preferred Stock and because the Credit Agreements prohibit such redemption, the Company anticipates the redemption
date of the Series B and B1 Preferred Stock being extended past June 24, 2020, until such date, if ever, as the Company’s senior credit facilities (and any
facilities which replace or refinance the Credit Agreements) no longer prohibit such redemptions. Effective on June 24, 2020, in the event the Series B and B1
Preferred Stock is not redeemed by the Company due to the provisions of the Company’s senior credit facilities, the dividend rate of such preferred stock
increases to 10% per annum. Notwithstanding the dividend rate increase, because the interest is payable in-kind (or in registered shares of common stock, if
allowed under the applicable certificate of designation of the preferred stock, at the option of the Company), the increase in dividend rate following the
redemption date may cause significant additional shares of Series B and B1 Preferred Stock and/or common stock to be due to the holders of such Series B and
B1 Preferred Stock and may cause significant dilution to existing shareholders.
Notwithstanding the above, pursuant to the Nevada Revised Statutes, no redemption of the Series B or B1 Preferred Stock is allowed unless such
redemption would not result in the Company (i) having less (a) assets than its (b) total liabilities plus the liquidation rights of any preferred stock or other
preferred right holders and/or (ii) being unable to pay its debts as they become due after such redemption. Furthermore, the Series B and B1 Preferred Stock
designations currently only provide for an ‘all or nothing’ type redemption, and as such, regardless of the compliance of the redemptions of the Series B and B1
Preferred Stock with the terms of the Company’s senior credit agreements, the Company anticipates being legally unable to redeem the Series B and B1
Preferred Stock due to the requirements of Nevada law and the ‘all or nothing’ requirement of such preferred stock until such time as the Company has sufficient
cash on hand to pay the entire liquidation preference of the Series B and B1 Preferred Stock ($23.0 million) and have sufficient cash left over to pay its debts as
they become due.
Due to the above, the holders of the Series B and B1 Preferred Stock may be forced to hold such Series B and B1 Preferred Stock indefinitely and the
Company may never be in a position to contractually or legally redeem the Series B and B1 Preferred Stock. The only rights of the holders of the Series B and
B1 Preferred Stock in the event the Company is unable to redeem such preferred stock due to the reasons above would be to continue to hold such preferred
stock (with dividends accruing at 10% per annum), sell such preferred stock in private transactions, or convert such preferred stock into common stock pursuant
to the terms thereof.
Finally, notwithstanding the prohibitions on redemptions described above, the Company does not currently have the funds required to redeem such
Series B and B1 Preferred Stock (i.e., an aggregate of $23.0 million), and does not anticipate having such funds in the near term, if at all. Consequently, the
Company does not anticipate redeeming the Series B and B1 Preferred Stock on June 24, 2020 or at any time in the foreseeable future.
The issuance of common stock upon conversion of the Series B Preferred Stock and Series B1 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 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 issuance of common stock upon conversion of the Series B Preferred Stock, and Series B1 Preferred Stock will result in immediate and substantial
dilution to the interests of other stockholders since the holders of the Series B Preferred Stock and
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Series B1 Preferred Stock may ultimately receive and sell the full amount of shares issuable in connection with the conversion of such Series B Preferred Stock
and Series B1 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), 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 and Series B1 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 or Series B1 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 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 $12.0 million in aggregate as of the date of this report), increasing to 10% per annum
in the event we are contractually or legally, unable to redeem the Series B Preferred Stock on June 24, 2020. 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 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 $10.9 million in aggregate), provided that such dividend was to increase to 9% if
certain Consolidated Adjusted EBITDA targets were not met during various periods between 2017-2018, and increasing to 10% per annum in the event we are
contractually or legally, unable to redeem the Series B Preferred Stock on June 24, 2020. 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 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 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 or may be prohibited contractually, or pursuant to applicable law, from
paying such dividends in cash. 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.
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 choose not to pay, or are prohibited from paying, the dividends which accrue on the Series B Preferred Stock and
Series B1 Preferred Stock 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.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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. 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.
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 Nasdaq may require 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.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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 segment.
In addition, the Company leases four smaller facilities, one located in San Antonio, Texas, one in Mission, Texas, one in Pittsburg, 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, 2020, and a rental cost of $1,250 per month. The Pittsburg lease is for three years, expiring May
1, 2020, at a monthly cost of $4,776. The Dallas lease expired in August 31, 2015, but we continue to lease this facility on a month to month basis for a rental
cost of $4,500 per month. These facilities are related to the operations of the Black Oil segment.
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 segment.
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 $10,709 per month through maturity June 30, 2021. This property relates to general administrative functions of the Company and
is proportionally allocated to each of our three segments.
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 had a term expiring on March 22, 2018, but we continue to lease this
facility on a month-to-month basis, pursuant to the terms of the lease, and a rental cost of $2,300 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 $1,772 per month.
The Company owns or co-owns five other facilities, which are located in Ohio. Two facilities are located in Columbus, of which one is the location of our
refinery and the other is for the storage of feedstocks and finished products, the indirect ownership of 65% of which was transferred to Tensile in connection with
the Heartland SPV (discussed above under “Part I” - “Item 1. Business” - “Recent Material Transactions” - “Heartland Share Purchase and Subscription
Agreement”), effective January 1, 2020. 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 Sandusky, Ohio and is
used for bulk storage of used oil and as a transfer facility. All properties relate to the operations of the Black Oil segment.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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 2023, with a monthly rental cost of $258,000. The lease also provides us the right to extend the lease for up to four additional five year extension
terms through April 2043. This facility is related to the operations of the Black Oil segment.
Myrtle Grove:
Prior to June 17, 2019, we owned all of, and subsequent to June 17, 2019, as a result of the MG Purchase Agreement, defined and described above
under “Part I” - “Item 1. Business” - “Recent Material Transactions” - “Heartland Share Purchase and Subscription Agreement”- “Myrtle Grove Share Purchase
and Subscription Agreement”, we own 84.42% of an entity which leases 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 transferred additional refining equipment which we owned or leased located on the site to MG SPV in connection with the transaction described above. The
lease has a term expiring in May 2022, and a rental cost of $54,000 per month. The lease also has 10 additional five year term renewal options through 2072,
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 segment.
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.
Such current litigation or other legal proceedings are described in, and incorporated by reference in, this “ Item 3. Legal Proceedings” of this Annual
Report on Form 10-K from, “Part II” - “Item 8. Financial Statements and Supplementary Data” in the Notes to Consolidated Financial Statements in “ Note 4.
Concentrations, Significant Customers, Commitments and Contingencies”, under the heading “ Litigation”. The Company believes that the resolution of currently
pending matters will not individually or in the aggregate have a material adverse effect on our financial condition or results of operations. However, assessment
of the current litigation or other legal claims could change in light of the discovery of facts not presently known to the Company or by judges, juries or other
finders of fact, which are not in accord with management’s evaluation of the possible liability or outcome of such litigation or claims.
Additionally, the outcome of litigation is inherently uncertain. If one or more legal matters were resolved against the Company in a reporting period for
amounts in excess of management’s expectations, the Company’s financial condition and operating results for that reporting period could be materially adversely
affected.
Item 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
MARKET INFORMATION
PART II
Our common stock is traded on the NASDAQ Capital Market (“ NASDAQ”) under the symbol “ VTNR”.
HOLDERS
As of March 3, 2020, there were approximately (a) 264 holders of record of our common stock, not including holders who hold their shares in street
name, and 45,554,841 shares of common stock issued and outstanding; (b) 74 holders of record of our 419,859 outstanding shares of Series A Preferred Stock;
(c) 11 holders of record of our 3,883,449 outstanding shares of Series B Preferred Stock; and (d) 9 holders of record of our 7,004,236 outstanding shares of
Series B1 Preferred Stock.
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 (of which none are outstanding) is 44,000
(“Series C Preferred 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;
•
•
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
•
•
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 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 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, provided that such redemption is not required in the event the Company is
contractually (which it is under its Credit Agreements) or legally prohibited from redeeming such preferred stock. In the event Series B Preferred Stock is not
redeemed on June 24, 2020,
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
the dividend rate increases to 10% per annum, until such time, if ever, as the Company is contractually and legally able to redeem such preferred stock.
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 increased to 9% if the Consolidated Adjusted EBITDA (defined below) targets described below were 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 were 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 targets for the three months ended March 31, 2017, six months ended June 30, 2017, nine months ended
September 30, 2017 and twelve months ending December 31, 2017 were not met and as a result the Series B1 Preferred Stock accrued a 9% dividend from
June 30, 2017 through June 30, 2018.
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, or chooses not to pay, the dividend in cash 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
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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 $1.72 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 $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), provided that such
redemption is not required in the event the Company is contractually (which it is under its Credit Agreements) or legally prohibited from redeeming such
preferred stock. In the event Series B Preferred Stock is not redeemed on June 24, 2020, the dividend rate increases to 10% per annum, until such time, if ever,
as the Company is contractually and legally able to redeem such 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).
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.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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
The below includes information on recent sales of unregistered securities during the three months ended December 31, 2019 and from the period from
January 1, 2020 to the filing date of this report, and does not include information which has previously been included in a Quarterly Report on Form 10-Q or in a
Current Report on Form 8-K:
For the period from October 1, 2019 to December 31, 2019, a total of approximately $177,921 of dividends accrued on our outstanding Series B
Preferred Stock and $211,269 of dividends accrued on our outstanding Series B1 Preferred Stock. We chose to pay such dividends in-kind by way of the
issuance of 57,394 restricted shares of Series B Preferred Stock pro rata to each of the then holders of our Series B Preferred Stock in January 2020 and the
issuance of 135,429 restricted shares of Series B1 Preferred Stock pro rata to each of the then holders of our Series B1 Preferred Stock in January 2020. If
converted in full, the 57,394 shares of Series B Preferred Stock would convert into 57,394 shares of common stock and the 135,429 shares of Series B1
Preferred Stock would convert into 135,429 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.
On January 13, 2020, a holder of our Series B1 Preferred Stock converted 9,018 shares of Series B1 Preferred Stock into 9,018 shares of common
stock, pursuant to the terms of such Series B1 Preferred Stock.
On January 22, 2020, two holders of our Series B1 Preferred Stock converted 25,000 shares each of Series B Preferred Stock into 25,000 shares of
common stock each, pursuant to the terms of such Series B Preferred Stock.
On January 27, 2020, a holder of our Series B1 Preferred Stock converted 252,337 shares of Series B1 Preferred Stock into 252,337 shares of common
stock, pursuant to the terms of such Series B1 Preferred Stock.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
On January 28, 2020, two holders of our Series B1 Preferred Stock converted 17,000 shares each of Series B Preferred Stock into 17,000 shares of
common stock, each, pursuant to the terms of such Series B1 Preferred 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.
As of the date of this filing, there were 419,859 outstanding shares of Series A Preferred Stock, which if converted in full, could be converted into
419,859 shares of common stock; 3,883,449 outstanding shares of Series B Preferred Stock, which if converted in full, could be converted into 3,883,449 shares
of common stock; and 7,004,236 outstanding shares of Series B1 Preferred Stock, which if converted in full, could be converted into 7,004,236 shares of
common stock.
Use of Proceeds From Sale of Registered Securities
None.
Issuer Purchases of Equity Securities
None.
58
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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.
Statement of Operations Data:
Revenues
Income (loss) from operations
Basic net loss per share
Diluted net loss per share
Weighted average number of basic common
shares outstanding
Weighted average number of diluted common
shares outstanding
Consolidated Balance Sheet Data
Cash and cash equivalents
Working capital (deficit)
Total assets
Long-term obligations
Total liabilities
Total temporary equity
Total equity
2019
2018
2017
2016
2015
Years Ended December 31,
163,365,565 $
180,720,661 $
145,499,092 $
98,078,914 $
146,942,461
(2,774,044) $
488,348 $
(7,056,263) $
(10,112,514) $
(14,093,041)
(0.28) $
(0.28) $
(0.23) $
(0.23) $
(0.36) $
(0.36) $
(0.51) $
(0.51) $
(0.86)
(0.86)
40,988,946
35,411,264
32,653,402
30,520,820
28,181,096
40,988,946
35,411,264
32,653,402
30,520,820
28,181,096
2019
2018
2017
2016
2015
As of December 31,
4,099,655 $
2,609,609 $
1,249,831 $
6,547,301 $
1,105,787 $
1,701,435 $
765,364
3,523,548 $
(1,268,192) $
(10,498,637)
120,759,919 $
84,160,408 $
84,305,474 $
86,985,968 $
93,644,816
44,714,247 $
16,175,790 $
16,013,267 $
6,214,103 $
7,088,263
69,511,546 $
33,171,401 $
32,961,171 $
28,667,747 $
40,753,674
28,146,347 $
22,179,963 $
22,959,945 $
19,604,255 $
11,955,207
23,102,026 $
28,809,044 $
28,384,358 $
38,713,966 $
40,935,935
$
$
$
$
$
$
$
$
$
$
$
The key operational issue contributing to the differences between 2019 and 2018 was the decrease in commodity prices. This resulted in lower 2019
revenues and cost of goods sold without a corresponding increase in our fixed costs. Other operating differences between 2019 and 2018, were due to the
acquisitions completed the first quarter of 2018.
59
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.
RESULTS OF OPERATIONS
Description of Material Financial Line Items:
Revenues
We generate revenues from three existing operating segments as follows:
BLACK OIL - Revenues for our Black Oil segment are comprised primarily of product sales from our re-refineries and feedstock sales (used motor oil)
which are purchased from generators of used motor oil such as oil change shops and garages, as well as a network of local and regional suppliers. Volumes are
consolidated for efficient delivery and then sold to third-party re-refiners and fuel oil blenders for the export market. In addition, through used oil re-refining, we re-
refine used oil into different commodity products. The Houston, Texas TCEP facility finished product is then sold by barge as a fuel oil cutterstock (provided that
TCEP has only once again been used for this purpose since the fourth quarter of 2019, and prior to that, beginning in the third quarter of 2015, due to economic
reasons, was temporarily being used to pre-treat our used motor oil feedstock prior to shipping to our facility in Marrero, Louisiana). 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, as well as to the marine fuels market.
Through the operations at our Columbus, Ohio facility, the ownership of 65% of which was transferred to Tensile in connection with the Heartland SPV
(discussed above under “Part I” - “Item 1. Business” - “Recent Material Transactions ”), effective January 1, 2020, 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.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
REFINING AND MARKETING - The Refining and Marketing segment generates revenues relating to the sales of finished products. The Refining and
Marketing segment gathers hydrocarbon streams in the form of petroleum distillates, transmix and other chemical products that have become off-specification
during the transportation or refining process. These feedstock streams are purchased from pipeline operators, refineries, chemical processing facilities and third-
party providers, and then processed at a third-party facility under our direction. The end products are typically three distillate petroleum streams (gasoline
blendstock, pygas and fuel oil cutterstock), which are sold to major oil companies or to large petroleum trading and blending companies. The end products are
delivered by barge and truck to customers.
RECOVERY - The Recovery segment is a generator solutions company for the proper recovery and management of hydrocarbon streams. We own and
operate a fleet of trucks and other vehicles used for shipping and handling equipment and scrap materials.
Our revenues are affected by changes in various commodity prices including crude oil, natural gas, #6 oil and metals.
Cost of Revenues
BLACK OIL - Cost of revenues for our Black Oil segment are comprised primarily of feedstock purchases from a network of providers. Other cost of
revenues 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 segment incurs cost of revenues relating to the purchase of feedstock, purchasing and
receiving costs, and inspection and processing of the feedstock into gasoline blendstock, pygas and fuel oil cutter by a third party. Cost of revenues also includes
broker’s fees, inspection and transportation costs.
RECOVERY - The Recovery segment incurs cost of revenues relating to the purchase of hydrocarbon products, purchasing and receiving costs, and
inspection. 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 fixed assets and intangible assets acquired in connection with the Vertex
Holdings, L.P. (formerly Vertex Energy, L.P.), a Texas limited partnership (“Holdings”), Omega Refining, LLC's (“Omega Refining”) and Warren Ohio Holdings
Co., LLC, f/k/a Heartland Group Holdings, LLC (“Heartland”), Acadiana Recovery, LLC (“ Acadiana”), Nickco Recycling, Inc. (“Nickco”), Ygriega Environmental
Services, LLC (“Ygriega”) and Specialty Environmental Services (“ SES”) acquisitions.
61
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2019 COMPARED TO THE THREE MONTHS ENDED DECEMBER 31,
2018
Set forth below are our results of operations for the three months ended December 31, 2019, as compared to the same period in 2018.
Revenues
$
42,588,302 $
41,801,748 $
786,554
Three Months Ended December 31,
2019
2018
$ Change
% Change
Cost of revenues
31,045,027
36,879,263
(5,834,236)
Gross profit
11,543,275
4,922,485
6,620,790
Selling, general and administrative expenses
6,652,623
5,258,572
1,394,051
Depreciation and amortization
1,846,604
1,756,996
89,608
Total operating expenses
8,499,227
7,015,568
1,483,659
Income (loss) from operations
3,044,048
(2,093,083)
5,137,131
Other Income
Loss on sale of assets
Gain (loss) on change in derivative warrant
liability
Interest Expense
Total other income (expense)
126
(105,554)
(819,239)
(747,291)
(1,671,958)
—
(5,970)
2,888,687
(833,084)
2,049,633
126
(99,584)
(3,707,926)
85,793
(3,721,591)
2 %
(16)%
135 %
27 %
5 %
21 %
245 %
100 %
(1,668)%
(128)%
10 %
(182)%
Income (loss) before income tax
1,372,090
(43,450)
1,415,540
3,258 %
Income tax provision
—
—
—
— %
Net income (loss) attributable to non-
controlling interest and redeemable non-
controlling interest
Net income (loss) attributable to Vertex
Energy, Inc.
(62,112)
157,883
(219,995)
(139)%
$
1,434,202 $
(201,333) $
1,635,535
812 %
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Each of our segments' gross profit (loss) during the three months ended December 31, 2019 and 2018 were as follows:
Black Oil
Revenues
Cost of Revenues
Gross profit
Refining And Marketing
Revenues
Cost of Revenues
Gross profit (deficit)
Recovery
Revenues
Cost of Revenues
Gross deficit
Three Months Ended December 31,
2019
2018
$ Change
% Change
36,215,635 $
24,822,137
11,393,498 $
32,730,540 $
27,280,433
5,450,107 $
3,485,095
(2,458,296)
5,943,391
Three Months Ended December 31,
2019
2018
$ Change
% Change
3,745,290 $
2,883,187
862,103 $
5,553,741 $
5,972,018
(418,277) $
(1,808,451)
(3,088,831)
1,280,380
Three Months Ended December 31,
2019
2018
$ Change
% Change
2,627,377 $
3,339,703
(712,326) $
3,517,467 $
3,626,812
(109,345) $
(890,090)
(287,109)
(602,981)
11 %
(9)%
109 %
(33)%
(52)%
(306)%
(25)%
(8)%
(551)%
$
$
$
$
$
$
Our revenues and cost of revenues are significantly impacted by fluctuations in commodity prices. Increases in commodity prices typically result in
increases 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.
Revenues increased 2% for the fourth quarter of 2019, compared to the same period in 2018, due primarily to increased volumes of products sold during
the period. Total volume increased 23% and gross profit increased 135% for the three months ended December 31, 2019, compared to same period in 2018.
Additionally, our per barrel margin increased 91% relative to the three months ended December 31, 2018. The majority of this increase was the result of the
drop in High Sulfur Fuel Oil commodity prices during the fourth quarter of 2019, which resulted in lowering the index that we purchase the majority of our
feedstock against, which improved our product spreads during this period.
During the three months ended December 31, 2019, total cost of revenues was $ 31,045,027, compared to $36,879,263 for the three months ended
December 31, 2019, a decrease of $5,834,236 or 16% from the prior period. The main reason for the decrease was the result of a decline in commodity prices,
which impacted our feedstock pricing and a decrease in volumes in our Refining & Marketing division, as well as our metals facilities.
Our Black Oil segment’s volume increased approximately 17% during the three months ended December 31, 2019 compared to the same period in
2018. This increase was mainly due to steady production during the period and not having a turnaround during the period at either of our refining facilities during
the three months ended December 31, 2019, compared to turn arounds during last year's period. Overall volume for the Refining and Marketing segment
decreased 26% during the three month period ended December 31, 2019, as compared to the same period in 2018. This is a result of a focus on the production
of higher quality finished products, which in turn has decreased the amount of volume being produced. This segment experienced a decrease in production of
54% for its cutterstock for the three months ended December 31, 2019, compared to the same period in 2018. Our gasoline blendstock volumes were down
100% for the three months ended December 31, 2019, compared to the same period in 2018. Our pygas volumes increased 8% for the three months ended
December 31, 2019, as compared to the same period in 2018.
63
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During the three months ended December 31, 2019, our Refining and Marketing cost of revenues were $ 2,883,187 of which the processing costs for our
Refining and Marketing business located at KMTEX were $588,070. Revenues for the same period were $3,745,290 while gross profit from operations was
$862,103. During the three months ended December 31, 2018, our Refining and Marketing cost of revenues were $ 5,972,018, which included the processing
costs at KMTEX of $650,481. Revenues for the same period were $ 5,553,741, while gross deficit from operations was $418,277.
Commodity prices decreased approximately 34% for the three months ended December 31, 2019, compared to the same period in 2018. The average
posting (U.S. Gulfcoast Residual Fuel No. 6 3%) for the three months ended December 31, 2019 decreased $21.02 per barrel from a three month average of
$61.59 per barrel during the three months ended December 31, 2018 to $40.57 per barrel during the three months ended December 31, 2019.
Overall gross profit increased 135% and our margin per barrel increased approximately 91% for the three months ended December 31, 2019, compared
to the same period in 2018. In our street collections and third party purchasing we were focused on lowering the prices paid to generators and suppliers for used
motor oil during 2019. Additionally, our street collections operations had to quickly shift its 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 period compared to this being a cost
and us paying for these services to be completed in certain prior periods. Volumes in our street collections were up 19% for the three months ended December
31, 2019 as compared to the same period in 2018. One of our key initiatives continues to be a focus on growing our own volumes of collected material and
displacing the third party oil processed in our facilities.
We had selling, general and administrative expenses of $ 6,652,623 for the three months ended December 31, 2019, compared to $5,258,572 from the
prior year's period, an increase of $1,394,051 or 27% from the prior period. This increase is primarily due to the additional selling, general and administrative
expenses incurred during the period as a result of increased personnel costs, legal expenses, and insurance expenses related to our expansion of trucks and
facilities through organic growth, as well as increased accounting, legal and consulting expenses related to our Tensile transaction.
We had total other expense of $ 1,671,958 for the three months ended December 31, 2019, compared to total other income of $2,049,633 for the three
months ended December 31, 2018. The main reason for the change in other expense during 2019 was the loss of $819,239 during 2019, compared to the gain
of $2,888,687 during 2018, on change in value of derivative liability, in connection with certain warrants granted in June 2015 and May 2016, as described in
greater detail in "Note 14. Preferred Stock and Temporary Equity " to the consolidated financial statements included herein under " Part II"-"Item 8- Financial
Statements and Supplementary Data".
We had income before income taxes of $ 1,372,090 for the three months ended December 31, 2019 compared to a loss before income taxes of $ 43,450
for the three months ended December 31, 2018. The increase in income was mainly due to the decrease in costs of revenues as discussed above, partially
offset by a $3,707,926 increase in loss on change in derivative warrant liability related to the non-cash adjustment relating to the value of the June 2015 and May
2016 warrants, as discussed above.
We had net income attributable to Vertex Energy, Inc. of $1,434,202 for the three months ended December 31, 2019, compared to a net loss attributable
to Vertex Energy, Inc. of $201,333 for the three months ended December 31, 2018. The increase in net income was primarily due to increased direct collection
volumes of product into our facilities during the current year and increased finished product volumes, coupled with the decrease in cost of revenues as discussed
above.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
RESULTS OF OPERATIONS FOR THE FISCAL YEAR ENDED DECEMBER 31, 2019 COMPARED TO THE FISCAL YEAR ENDED DECEMBER 31,
2018
Revenues
Cost of revenues
Gross profit
Year Ended December 31,
2019
2018
$ Change
% Change
$
163,365,565
$
180,720,661
$
(17,355,096)
134,777,113
151,314,039
(16,536,926)
28,588,452
29,406,622
(818,170)
(10)%
(11)%
(3)%
10 %
3 %
8 %
Selling, general and administrative expenses
24,182,407
21,927,264
2,255,143
Depreciation and amortization
7,180,089
6,991,010
189,079
Total operating expenses
31,362,496
28,918,274
2,444,222
Income (loss) from operations
(2,774,044)
488,348
(3,262,392)
(668)%
Other income (expense)
Other income
Gain (loss) on sale of assets
Gain (loss) on change in value of derivative warrant liability
Interest expense
Total other expense
Loss before income tax
Income tax benefit
Net loss
920,197
(74,111)
(487,524)
(3,070,071)
(2,711,509)
659
45,553
763,716
(3,281,855)
(2,471,927)
919,538
(119,664)
(1,251,240)
211,784
(239,582)
139,535 %
(263)%
(164)%
6 %
(10)%
(5,485,553)
(1,983,579)
(3,501,974)
(177)%
—
—
—
— %
(5,485,553)
(1,983,579)
(3,501,974)
(177)%
Net income (loss) attributable to non-controlling interest and redeemable non-
controlling interest
(436,974)
234,188
(671,162)
(287)%
Net loss attributable to Vertex Energy, Inc.
$
(5,048,579)
$
(2,217,767)
$
(2,830,812)
(128)%
65
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
Revenues
Cost of revenues
Gross profit
Refining And Marketing
Revenues
Cost of revenues
Gross profit
Recovery
Revenues
Cost of revenues
Gross profit
Year Ended December 31,
2019
2018
$ Change
% Change
$
$
$
$
$
$
139,269,164 $
143,836,981 $
113,196,583
116,524,465
(4,567,817)
(3,327,882)
26,072,581 $
27,312,516 $
(1,239,935)
12,957,767 $
22,935,482 $
(9,977,715)
10,651,069
22,290,277
(11,639,208)
2,306,698 $
645,205 $
1,661,493
11,138,634 $
13,948,198 $
10,929,461
12,499,297
(2,809,564)
(1,569,836)
209,173 $
1,448,901 $
(1,239,728)
(3)%
(3)%
(5)%
(44)%
(52)%
258 %
(20)%
(13)%
(86)%
Our revenues and cost of revenues are significantly impacted by fluctuations in commodity prices. Increases in commodity prices typically result in
increases 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 10% for the year ended December 31, 2019, compared to the year ended December 31, 2018, due primarily to decreases in
commodity prices during the period of approximately 10%. The average posting (U.S. Gulfcoast Residual Fuel No. 6 3%) for 2019 decreased $7.31 per barrel
from a 2018 average of $61.21 per barrel to an average of $53.90 per barrel during 2019. On average, prices we received for our products decreased 10% for the
year ended December 31, 2019, compared to the year ended December 31, 2018.
Volume for our Black Oil segment increased 5% during fiscal 2019 compared to 2018. This volume increase is attributable to the increased amount of
product which was processed through our facilities in Columbus, Ohio , the ownership of 65% of which was transferred to Tensile in connection with the
Heartland SPV (discussed above under “Part I” - “Item 1. Business” - “Recent Material Transactions ”), effective January 1, 2020, and Marrero, Louisiana during
the period ended December 31, 2019, as compared to the same period in 2018. Our per barrel margin in the Black Oil segment decreased approximately 10%
for the year ended December 31, 2019 from the same period in 2018. The decrease in margins was due to the issues experienced during the first half of the
year at our refining facilities relating to weather events, extended turnarounds and overall operational challenges which caused an increase in operating
expenses. Our Black Oil segment, which includes our TCEP facility, the Marrero facility and the Heartland facility (of which we own 35% effective January 1,
2020), generated revenues of $139,269,164 for the year ended December 31, 2019, with cost of revenues of $ 113,196,583, producing a gross profit of
$26,072,581. During the year ended December 31, 2018, these revenues were $ 143,836,981 with cost of revenues of $116,524,465, producing a gross profit of
$27,312,516. Gross profit decreased for the year ended December 31, 2019, compared to 2018, as a result of increased operating expenses through our various
facilities offset by diligent management of our street collections and pricing.
Total volume company-wide was up 5% during fiscal 2019 compared to 2018, and our total per barrel margin decreased approximately 8% for fiscal
2019, compared to 2018. This decrease was a result of increased operating expenses experienced at our facilities during 2019. We experienced increased
turnaround costs during the year as a result of hurricane/weather delays as well as substantially increased transportation expenses due to weather and fog along
the Gulf Coast and Mississippi River.
Our Refining and Marketing segment experienced a decrease in production of 63% for its fuel oil cutterstock product for the year ended December 31,
2019, compared to the same period in 2018, as a result of a focus on the production of higher quality finished products, which in turn has decreased the amount
of volume being produced, and our fuel oil cutterstock commodity prices decreased approximately 12% over the same period. The average posting (U.S.
Gulfcoast No. 2 Waterborne) during 2019 decreased $7.18 per barrel from $61.08 per barrel for the year ended December 31, 2018 to $53.90 per barrel for the
year ended December 31, 2019.
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Our pygas production decreased 3% for the year ended December 31, 2019, compared to the same period in 2018 and commodity prices decreased
approximately 10% for our pygas finished product for 2019, compared to the same period in 2018.
Our gasoline blendstock volumes decreased 100% for the year ended December 31, 2019 as compared to 2018. This was a result of no longer
processing gasoline blendstocks in our Refining and Marketing division as the processing margins were no longer economically feasible. The lower margins were
a result of decreases in available feedstock volumes. We have also had to assess the volume of fuel oil cutterstocks that we manage due to enhanced quality of
products being demanded in the marketplace.
Overall volume for the Refining and Marketing segment decreased 34% during the year ended December 31, 2019, compared to the year ended
December 31, 2018. Margins per barrel increased in the Refining and Marketing segment as a result of changes we have made in the products being managed
and processed as well as the pricing of these products.
During the year ended December 31, 2019, our Refining and Marketing cost of revenues were $ 10,651,069, of which the processing costs for our
Refining and Marketing business located at KMTEX were $2,007,295. Revenues for the same period were $12,957,767, while gross profit from operations was
$2,306,698. During the year ended December 31, 2018, our Refining and Marketing cost of revenues were $ 22,290,277, which included the processing costs at
KMTEX of $2,223,633. Revenues for the same period were $22,935,482, while gross profit was $645,205.
Our Recovery segment includes the business operations of Vertex Recovery Management as well as our Group III base oil business. Vertex acts 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. Revenues
for this segment decreased during 2019, as compared to the same period in 2018. This segment 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
started; however we believe these are very good projects for the Company and we anticipate more in the upcoming periods. Revenues for this division
decreased 20% as a result of a significant decrease in steel volumes and prices during 2019, as compared to 2018. Volumes of petroleum products acquired in
our Recovery business were up 36% during the twelve months ended December 31, 2019, as compared to the same period in 2018. We are continuing to focus
on volume growth in this division.
Prevailing prices of certain commodity products can significantly impact our revenues and cash flows. As noted above the revenue variances from fiscal
2018 to 2019 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 2019 for our key benchmarks.
2019
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)
$
2.01
2.08
68.54
66.30
September 16 $
1.53
January 2
April 10 $
April 25 $
April 23 $
1.31
32.05
46.54
January 2
November 19
January 2
67
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The following table sets forth the high and low spot prices during 2018 for our key benchmarks.
2018
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)
$
2.32
2.20
73.42
76.41
October 1 $
1.50
December 28
October 3 $
October 9 $
October 1 $
1.26
47.27
44.61
December 27
December 27
December 27
We saw a steady decline in each of the benchmark commodities we track during 2019 and 2018. During 2018 and specifically the second half of 2019,
the commodity markets experienced a steady decline due to overall global economic conditions mostly related to supply and demand for the products we track.
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 decreased 3% to $28,588,452 for the year ended December 31, 2019 from $29,406,622 for the year ended December 31, 2018, primarily
due to operational impacts to our business at our refining locations. We experienced extended delays due to weather events in the Gulf Coast which caused
extended downtime at our facility during the year ended December 31, 2019. This resulted in higher turnaround costs as well as decreased production. In
addition we experienced increased costs around our metals division during the year due to an increase in the market price of metals.
We had selling, general and administrative expenses of $ 24,182,407 for the year ended December 31, 2019, compared to $21,927,264 for the prior
year’s period, an increase of $2,255,143 or 10% from the prior period, due to the additional selling, general and administrative expenses incurred during the
period as a result of increased personnel costs, legal expenses, and insurance expenses related to expansion of trucks and facilities through organic growth, as
well as increased accounting, legal and consulting expenses related to our Tensile transaction.
We had total other expense of $ 2,711,509 for the year ended December 31, 2019, compared to total other expense of $2,471,927 for the year ended
December 31, 2018. The main reasons for the change in other expense during 2019 was the receipt of a payment of $ 907,500 related to the proceeds of an
insurance settlement for a fire that had occurred at the used oil re-refining plant located in Churchill County, Nevada, which we previously rented during the year
ended December 31, 2019 as compared to year ended December 31, 2018, and the loss of $487,524 during 2019, compared to the gain of $ 763,716 during
2018, on change in value of derivative liability, in connection with certain warrants granted in June 2015 and May 2016, as described in greater detail in "Note
14. 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 before income taxes of $ 5,485,553 for the year ended December 31, 2019, compared to a loss before income taxes of $ 1,983,579, for the
year ended December 31, 2018, a 177% increase. The increase in net loss before taxes was attributable to the decline in market and commodity prices, which
reduced revenues during the period, as well as the increase in selling, general and administrative expenses.
We had a net loss attributable to Vertex Energy, Inc. of $ 5,048,579 for the year ended December 31, 2019, compared to a net loss of $ 2,217,767 for the
year ended December 31, 2018, an increase in net loss of $ 2,830,812 or 128% from the prior period for the reasons described above.
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Revenues
Cost of revenues
Gross profit
Selling, general and administrative
expenses
Depreciation and amortization
Total operating expenses
Income (loss) from operations
Other income (expense)
Interest income
Gain(loss) Asset Sales
Gain on change in value of derivative
liability
Interest expense
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.
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, 2019 and 2018, respectively.
Statements of Operations by Quarter
Fiscal 2019
Fiscal 2018
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
$
42,588,302
$
37,799,259
$
43,657,292 $
39,320,712 $
41,801,748 $
50,632,948 $
46,917,770 $
41,368,195
31,045,027
32,372,316
36,515,421
34,844,349
36,879,263
42,593,367
36,796,258
35,045,151
11,543,275
5,426,943
7,141,871
4,476,363
4,922,485
8,039,581
10,121,512
6,323,044
6,652,623
1,846,604
8,499,227
3,044,048
6,153,184
1,815,582
7,968,766
6,028,859
5,347,741
5,258,572
5,658,659
5,364,591
1,780,890
1,737,013
1,756,996
1,806,839
1,733,076
7,809,749
7,084,754
7,015,568
7,465,498
7,097,667
5,645,442
1,694,099
7,339,541
(2,541,823)
(667,878)
(2,608,391)
(2,093,083)
574,083
3,023,845
(1,016,497)
126
918,153
(105,554)
(819,239)
(747,291)
—
1,290,792
(826,005)
1,918
29,150
—
2,293
—
(5,970)
—
—
746,017
(1,705,094)
2,888,687
(2,169,133)
(738,972)
(757,803)
(833,084)
(798,800)
659
8,843
475,913
(847,456)
(362,041)
—
42,680
(431,751)
(802,515)
(1,191,586)
Total other income (expense)
(1,671,958)
1,382,940
38,113
(2,460,604)
2,049,633
(2,967,933)
Income (loss) before income taxes
1,372,090
(1,158,883)
(629,765)
(5,068,995)
(43,450)
(2,393,850)
2,661,804
(2,208,083)
Income tax benefit
Net income (loss)
—
—
—
—
—
—
—
—
1,372,090
(1,158,883)
(629,765)
(5,068,995)
(43,450)
(2,393,850)
2,661,804
(2,208,083)
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
(62,112)
(67,102)
(202,329)
(105,431)
157,883
(105,970)
131,736
50,539
$
1,434,202
$
(1,091,781)
$
(427,436) $
(4,963,564) $
(201,333) $
(2,287,880) $
2,530,068 $
(2,258,622)
42,063,871
41,376,335
40,294,870
40,195,925
40,062,779
35,144,113
33,300,456
33,063,732
42,783,248
41,376,335
40,294,870
40,195,925
40,062,779
35,144,113
37,013,651
33,063,732
69
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Statements of Operations by Quarters
Fiscal 2019
Fiscal 2018
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
$
$
$
$
$
$
36,215,635
$
32,330,530
$
37,907,811 $
32,815,187 $
32,730,540 $
40,400,064 $
38,469,131 $
32,237,246
24,822,137
27,663,982
31,368,939
29,341,525
27,280,433
32,550,126
29,723,927
26,969,978
11,393,498
$
4,666,548
$
6,538,872 $
3,473,662 $
5,450,107 $
7,849,938 $
8,745,204 $
5,267,268
3,745,290
$
3,076,454
$
3,277,402 $
2,858,621 $
5,553,741 $
7,313,630 $
4,392,870 $
5,675,241
2,883,187
2,511,314
2,705,031
2,551,537
5,972,018
7,044,218
4,034,509
5,239,532
862,103
$
565,140
$
572,371 $
307,084 $
(418,277) $
269,412 $
358,361 $
435,709
2,627,377
$
2,392,274
$
2,472,079 $
3,646,904 $
3,517,467 $
2,919,254 $
4,055,769 $
3,455,708
3,339,703
2,197,019
2,441,451
2,951,287
3,626,812
2,999,023
3,037,821
2,835,641
(712,326)
$
195,255
$
30,628 $
695,617 $
(109,345) $
(79,769) $
1,017,948 $
620,067
Black Oil
Revenues
Cost of revenues
Gross profit
Refining & Marketing
Revenues
Cost of revenues
Gross profit (loss)
Recovery
Revenues
Cost of revenues
Gross profit (loss)
The below graph charts our total quarterly revenue over time from March 31, 2018 to December 31, 2019:
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 segments' operations. The resulting operating cash flow is crucial to the viability and growth of our existing business lines.
We had total assets of $120,759,919 as of December 31, 2019, compared to $84,160,408 at December 31, 2018. The increase was mainly due to the
implementation of the new lease accounting requirements during the year ended December 31, 2019, which mandated the recognition of operating lease right of
use assets totaling an aggregate of $35,586,885. The recognition of these right of use assets on the balance sheet existed in prior periods as well, but were not,
due to the then accounting requirements, treated as assets on our balance sheet. Without taking into account the operating lease right to use assets, our total
assets would have been $85,173,034 at December 31, 2019.
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We had total liabilities of $69,511,546 as of December 31, 2019, compared to total liabilities of $33,171,401 as of December 31, 2018. The increase in
liabilities was mainly in connection with the implementation of the new lease accounting requirements, which created a new line item on the balance sheet,
operating lease liability, which totaled $35,586,885 as of December 31, 2019.
We had working capital of $ 2,609,609 as of December 31, 2019, compared to working capital of $6,547,301 as of December 31, 2018. The decrease in
working capital is mainly due to the addition in the current period of the current portion of the operating lease liability in connection with the implementation of the
new lease accounting requirements.
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.
The Company financed insurance premiums through various financial institutions bearing interest rates from 4.00% to 4.90%. All such premium finance
agreements have maturities of less than one year and have a balance of $1,165,172 at December 31, 2019.
Credit and Guaranty Agreement and Revolving Credit Facility with Encina Business Credit, LLC and Credit Agreement Amendments
Our outstanding EBC Credit Agreement and the Revolving Credit Agreement are defined and described in greater detail under “ Part II” - “Item 8. Financial
Statements and Supplementary Data” - “Note 9. Line of Credit and Long-Term Debt ” - “Credit and Guaranty Agreement and Revolving Credit Facility with Encina
Business Credit, LLC" and " Credit Agreement Amendments ”.
The principal balances of the EBC Credit Agreement and the Revolving Credit Agreement as of December 31, 2019 are $13,333,000 and $ 3,276,230,
respectively.
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 process costs and would depend on the location and site specifics of the facility.
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.
We will also need additional capital in the future to redeem our Series B Preferred Stock and Series B1 Preferred Stock, provided that the required
redemption date of such preferred stock (June 24, 2020), provided that, as discussed above under “Part I” - “Item 1A. Risk Factors” - “We do not anticipate
redeeming our Series B and B1 Preferred Stock on June 24, 2020, notwithstanding the fact that our Series B and B1 Preferred Stock is required to be redeemed
on June 24, 2020, subject to the terms of the Certificate of Designations of such Preferred Stock and applicable law, and the dividend rate of such Preferred
Stock increases to 10% per annum in the event the Company is unable to complete such redemptions.”, we do not anticipate being contractually, or legally, able
to redeem such stock on such date, and further do not anticipate having sufficient cash on hand to complete such redemption on such date, or in the near term.
In the event such preferred stock is not redeemed on June 24, 2020, the preferred stock will accrue a 10% per annum dividend (payable in-kind at the option of
the Company), until such preferred stock is redeemed or converted into common stock.
71
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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 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, 2019 compared to the fiscal year ended December 31, 2018 were as follows:
Beginning cash, cash equivalents, and restricted cash
Net cash provided by (used in):
Operating activities
Investing activities
Financing activities
Net increase in cash, cash equivalents, and restricted cash
Ending cash, cash equivalents, and restricted cash
Twelve Months Ended December 31,
2019
2018
2,849,831 $
1,105,787
2,473,167
(3,626,440)
2,503,267
1,349,994
4,199,825 $
5,376,287
(2,768,943)
(863,300)
1,744,044
2,849,831
$
$
Operating activities provided cash of $2,473,167 for the year ended December 31, 2019, as compared to providing cash of $ 5,376,287 in 2018. 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 reason for the decrease in cash provided by operating activities for the year ended December 31, 2019, compared to the same period in
2018, was the increase in net loss, increase in accounts receivable and decrease in accounts payable, the loss on commodity derivative contracts, decrease in
inventory and increase in accrued expenses.
Investing activities used cash of $ 3,626,440 for the year ended December 31, 2019 as compared to using cash of $ 2,768,943 in 2018, due mainly to the
purchase of fixed assets.
Financing activities provided cash of $2,503,267 during the year ended December 31, 2019, as compared to using cash of $ 863,300 in 2018. The
financing activities were comprised of note proceeds of approximately $2.8 million and contributions from the noncontrolling interest of Tensile of $3.2 million and
proceeds from issuance of common stock and warrants to Tensile of $2.2 million, offset by approximately $4.6 million used to pay down our long-term debt, and
$0.6 million of payments on our line of credit. Financing activities for 2018 were comprised of note proceeds of approximately $4.0 million, offset by approximately
$4.1 million used to pay down our long-term debt, and $0.7 million of payments on our line of credit.
72
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Contractual Obligations
Future maturities of long term debt as of December 31, 2019 and December 31, 2018 were as follows:
Creditor
Loan Type
Origination Date
Maturity Date
Loan Amount
December 31, 2019 December 31, 2018
Term Loan
February 1, 2017
February 1, 2021 $
20,000,000 $
13,333,000 $
15,350,000
Tetra Capital Lease
Finance Lease
May, 2018
May, 2022
419,690
Revolving Note
February 1, 2017
February 1, 2021 $
10,000,000
3,276,230
264,014
3,844,636
349,822
$
$
Finance Lease
March, 2018
March, 2021
30,408
12,341
22,390
Finance Lease
April-May, 2019
April-May, 2024
$
621,000
551,260
—
Insurance premiums
financed
Various
< 1 year
$
2,902,428
1,165,172
999,152
18,602,017
20,566,000
(47,826)
(621,733)
$
18,554,191 $
19,944,267
Encina Business Credit,
LLC
Encina Business Credit
SPV, LLC
Wells Fargo Equipment
Lease-VRM LA
Wells Fargo Equipment
Lease-Ohio
Various institutions
Total
Deferred finance costs
Total, net of deferred
finance costs
Future contractual maturities on notes payable are summarized as follows:
Creditor
2020
2021
2022
2023
2024
Thereafter
Encina Business Credit, LLC
$
900,000 $
12,433,000 $
— $
— $
Encina Business Credit SPV, LLC
Tetra Capital Lease
Wells Fargo Equipment Lease-VRM LA
Wells Fargo Equipment Lease-Ohio
Various institutions
Totals
Deferred finance costs
3,276,230
91,779
10,537
114,848
1,165,172
—
98,167
1,804
120,895
—
— $
—
74,068
—
—
—
—
127,264
138,476
—
—
5,558,566
12,653,866
201,332
138,476
(47,826)
—
—
—
—
—
—
49,777
—
49,777
—
Totals, net of deferred finance costs
$
5,510,740 $
12,653,866 $
201,332 $
138,476 $
49,777 $
—
—
—
—
—
—
—
—
—
Critical Accounting Policies and Use of Estimates
Our financial statements are prepared in accordance with U.S. generally accepted accounting principles (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).
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Revenue Recognition.
We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified,
the contract has commercial substance and collectability of consideration is probable. Revenue is recognized when our performance obligations under the terms
of a contract with our customers are satisfied. Recognition occurs when the Company transfers control by completing the specified services at the point in time
the customer benefits from the services performed or once our products are delivered. Revenue is measured as the amount of consideration we expect to
receive in exchange for completing our performance obligations. Sales tax and other taxes we collect with revenue-producing activities are excluded from
revenue. In the case of contracts with multiple performance obligations, the Company allocates the transaction price to each performance obligation based on
the relative stand-alone selling prices of the various goods and/or services encompassed by the contract. We do not have any material significant payment terms,
as payment is generally due within 30 days after the performance obligation has been satisfactorily completed. The Company has elected the practical expedient
to recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that we otherwise would have
recognized is one year or less. In applying the guidance in Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) Topic 606, there
were no judgments or estimates made that the Company deems significant.
The nature of the Company's contracts give rise to certain types of variable consideration. The Company estimates the amount of variable consideration
to include in the estimated transaction price based on historical experience, anticipated performance and its best judgment at the time and to the extent it is
probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved.
From time to time, our fuel oil customers in our Black Oil segment may request that we store product which they purchase from us in our facilities. We
recognize revenues for these “bill and hold” sales once the following criteria have been met: (1) there is a substantive reason for the arrangement, (2) the product
is segregated and identified as the customer's asset, (3) the product is ready for delivery to the customer, and (4) we cannot use the product or direct it to
another customer.
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.
Our Level 2 liabilities include our marked to market changes in the estimated value of our open derivative contracts held at the balance sheet date.
Our Level 3 liabilities include our marked to market changes in the estimated value of our derivative warrants issued in connection with our Series B
Preferred Stock and Series B1 Preferred Stock.
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The Company estimates the fair values of the crude oil swaps and collars based on published forward commodity price curves for the underlying
commodity as of the date of the estimate for which published forward pricing is readily available. The determination of the fair values above incorporates various
factors including the impact of the Company's non-performance risk and the credit standing of the counterparty involved in the Company's derivative contracts. In
addition, the Company routinely monitors the creditworthiness of its counterparty.
Nonfinancial assets and liabilities measured at fair value on a nonrecurring basis include certain nonfinancial assets and liabilities as may be acquired in
a business combination and thereby measured at fair value.
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, 2019.
Derivative transactions.
All derivative instruments are recorded on the accompanying balance sheets at fair value. These derivative transactions are not designated as cash flow
hedges under FASB ASC 815, Derivatives and Hedges. Accordingly, these derivative contracts are marked-to-market and any changes in the estimated value of
derivative contracts held at the balance sheet date are recognized in the accompanying statements of operations as net gain or loss on derivative contracts. The
derivative assets or liabilities are classified as either current or noncurrent assets or liabilities based on their anticipated settlement date. The Company nets
derivative assets and liabilities for counterparties where it has a legal right of offset.
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 require the Company to redeem such preferred stock on the fifth anniversary of the issuance of the Series B Preferred Stock and
Series B1 Preferred Stock. 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.
Redeemable Noncontrolling Interest
As more fully described in “ Part II” - “Item 8. Financial Statements and Supplementary Data” - "Note 6. Myrtle Grove Share Purchase and Subscription
Agreement", the Company is party to a put/call option agreement with the holder of MG SPV’s non-controlling interest. The put option permits the MG SPV's
non-controlling interest holder, at any time on or after the earlier of (a) July 26, 2024 and (ii) the occurrence of certain triggering events (a “MG Redemption”) to
require MG SPV to redeem the non-controlling interest from the holder of such interest. Per the agreement, the cash purchase price for such redeemed Class B
Units is the greater of (y) the fair market value of such units (without discount for illiquidity, minority status or otherwise) as determined by a qualified third party
agreed to in writing by a majority of the holders seeking an MG Redemption and Vertex Operating
75
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
(provided that Vertex Operating still owns Class A Units on such date) and (z) the original per-unit price for such Class B Units plus fifty percent (50%) of the
aggregate capital invested by the Class B Unit holders through such MG Redemption date. The agreement also permits the Company to acquire the non-
controlling interest from the holder thereof upon certain events. Applicable accounting guidance requires an equity instrument that is redeemable for cash or other
assets to be classified outside of permanent equity if it is redeemable (a) at a fixed or determinable price on a fixed or determinable date, (b) at the option of the
holder, or (c) upon the occurrence of an event that is not solely within the control of the issuer.Distributions of available cash of MG SPV pursuant to the MG
Company Agreement (including pursuant to liquidations of MG SPV), subject to certain exemptions and exemptions set forth therein, are to be made (a) first, to
the holders of the Class B Units, in an amount equal to the greater of (A) the aggregate unpaid “Class B Yield” (equal to an annual return of 22.5% per annum)
and (B) an amount equal to fifty percent (50%) of the aggregate capital invested by the Class B Unit holders (initially Tensile-MG)(such aggregate capital
invested by the Class B Unit holders, the “MG Invested Capital”, which totals $3 million as of the Closing Date), less prior distributions (the greater amount of (A)
and (B), the “Class B Priority Distributions”); (b) second, the Class B Unitholders, together as a separate and distinct class, are entitled to receive an amount
equal to the aggregate MG Invested Capital; (c) third, the Class A Unitholders (other than Class A Unitholders which received Class A Units upon conversion of
Class B Units), together as a separate and distinct class, are entitled to receive all or a portion of any distribution equal to the sum of all distributions made under
sections (a) and (b) above; and (d) fourth, to the holders of Units who are eligible to receive such distributions in proportion to the number of Units held by such
holders. Based on this guidance, the Company has classified the MG SPV non-controlling interest between the liabilities and equity sections of the accompanying
December 31, 2019 and December 31, 2018 consolidated balance sheets. If an equity instrument subject to the guidance is currently redeemable, the instrument
is adjusted to its maximum redemption amount at the balance sheet date. If the equity instrument subject to the guidance is not currently redeemable but it is
probable that the equity instrument will become redeemable (for example, when the redemption depends solely on the passage of time), the guidance permits
either of the following measurement methods: (a) accrete changes in the redemption value over the period from the date of issuance (or from the date that it
becomes probable that the instrument will become redeemable, if later) to the earliest redemption date of the instrument using an appropriate methodology, or
(b) recognize changes in the redemption value immediately as they occur and adjust the carrying amount of the instrument to equal the redemption value at the
end of each reporting period. The amount presented in temporary equity should be no less than the initial amount reported in temporary equity for the instrument.
Because the MG SPV equity instrument will become redeemable solely based on the passage of time, the Company determined that it is probable that the MG
SPV equity instrument will become redeemable. The Company has elected to apply the second of the two measurement options described above. An adjustment
to the carrying amount of a non-controlling interest from the application of the above guidance does not impact net income in the consolidated financial
statements. Rather, such adjustments are treated as equity transactions.
Leases
In February 2016, the FASB issued Accounting Standards Update No. 2016-02 (ASU 2016-02), Leases (Topic 842). ASU 2016-02 requires companies to
recognize lease assets and lease liabilities on the balance sheet and disclose key information about leasing arrangements. We adopted ASU 2016-02, Leases
(Topic 842) effective January 1, 2019 and will not recast comparative periods in transition to the new standard. In addition, we elected certain
practical expedients which permit us to not reassess whether existing contracts are or contain leases, to not reassess the lease classification of any existing
leases, to not reassess initial direct costs for any existing leases, and to not separate lease and nonlease components for all classes of underlying assets. We
also made an accounting policy election to keep leases with an initial term of 12 months or less off of the balance sheet for all classes of underlying assets.
Adoption of the new standard resulted in an increase in the Company’s assets and liabilities of approximately $37.8 million. The ASU did not have an impact on
our consolidated results of operations or cash flows. Additional information and disclosures required by this new standard are contained in “Part II” - “Item 8.
Financial Statements and Supplementary Data” - "Note 18. Leases".
Internal Use Software and Cloud Computing Costs
We adopted the guidance in ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40) -Customer's Accounting for
Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, on January 1, 2019. This ASU requires entities in a hosting
arrangement that is a service contract to follow the guidance in Subtopic 350-40, Internal-Use Software, to determine which costs to implement the service
contract would be capitalized as an asset related to the service contract and which costs would be expensed. The requirements of ASU 2018-15 have been
applied on a prospective basis to implementation costs incurred on or after January 1, 2019. As a result of the adoption of ASU 2018-15, we capitalized $0.7
million of implementation costs for the year ended December 31, 2019. We have not recognized any amortization related to these implementation costs for the
year ended December 31, 2019.
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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
Interest Rate Risk
We are exposed to interest rate risks primarily through borrowings under various bank facilities. Interest on these facilities is based upon variable interest
rates using LIBOR or Prime as the base rate.
A t December 31, 2019, the Company had about $13.3 million of variable-rate term debt outstanding. At this borrowing level, a hypothetical relative
increase of 10% in interest rates would have an unfavorable but insignificant impact on the Company’s pre-tax earnings and cash flows. The primary interest rate
exposure on variable-rate debt is based on the LIBOR rate (1.69% at December 31, 2019) plus 6.50% per year.
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.
77
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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-6
F-7
F-8
F-10
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 Shareholders
Vertex Energy, Inc.
Houston, Texas
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Vertex Energy, Inc. (the "Company") and subsidiaries as of December 31, 2019 and 2018,
and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2019,
and the related notes (collectively referred to as the " consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 2019 and 2018, and the results of its operations and their cash flows for each of the two
years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's
consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United
States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules
and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to
have, nor were we engaged to perform, an audit of its internal controls over financial reporting. As part of our audit we are required to obtain an understanding of
internal control over financial reporting 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.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud,
and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in
the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provided a reasonable basis for our opinion.
/s/ Ham, Langston & Brezina, L.L.P.
We have served as the Company's auditor since 2017.
Houston, Texas
March 3, 2020
F-2
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
ASSETS
Current assets
Cash and cash equivalents
Restricted cash
Accounts receivable, net
Federal income tax receivable
Inventory
Derivative commodity asset
Prepaid expenses and other current assets
Total current assets
Fixed assets, at cost
Less accumulated depreciation
Fixed assets, net
Finance lease right-of-use assets
Operating lease right-of-use assets
Intangible assets, net
Deferred income taxes
Other assets
TOTAL ASSETS
VERTEX ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2019 December 31, 2018
$
4,099,655 $
100,170
12,138,078
68,606
6,547,479
—
4,452,920
27,406,908
69,469,548
(24,708,151)
44,761,397
851,570
35,586,885
11,243,800
68,605
840,754
1,249,831
1,600,000
9,027,990
137,212
8,091,397
695,941
2,740,541
23,542,912
66,762,388
(19,874,896)
46,887,492
397,515
—
12,578,519
137,211
616,759
$
120,759,919 $
84,160,408
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
LIABILITIES, TEMPORARY EQUITY AND EQUITY
Current liabilities
Accounts payable
Accrued expenses
Dividends payable
Finance lease-current
Operating lease-current
Current portion of long-term debt, net of unamortized finance costs
Revolving note
Derivative commodity liability
Total current liabilities
Long-term debt, net of unamortized finance costs
Finance lease-long-term
Operating lease-long-term
Contingent consideration
Derivative warrant liability
Total liabilities
COMMITMENTS AND CONTINGENCIES (Note 4)
TEMPORARY EQUITY
Series B Preferred Stock, $0.001 par value per share;
December 31, 2019 December 31, 2018
$
7,620,098 $
5,016,132
389,176
217,164
5,885,304
2,017,345
3,276,230
375,850
8,791,529
2,535,347
403,002
95,857
—
1,325,240
3,844,636
—
24,797,299
16,995,611
12,433,000
610,450
29,701,581
—
1,969,216
69,511,546
14,402,179
276,355
—
15,564
1,481,692
33,171,401
—
—
10,000,000 shares authorized, 3,826,055 and 3,604,827 shares issued
and outstanding at December 31, 2019 and 2018, respectively with liquidation preference of $11,860,771 and $11,174,964 at
December 31, 2019 and 2018, respectively.
11,006,406
8,900,208
Series B1 Preferred Stock, $0.001 par value per share;
17,000,000 shares authorized, 9,028,085 and 10,057,597 shares issued
and outstanding at December 31, 2019 and 2018, respectively with liquidation preference of $14,083,813 and $15,689,851 at
December 31, 2019 and 2018, respectively.
Redeemable non-controlling interest
Total Temporary Equity
12,743,047
13,279,755
4,396,894
28,146,347
—
22,179,963
See accompanying notes to the consolidated financial statements
F-4
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
VERTEX ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2019 December 31, 2018
EQUITY
Series A Convertible Preferred stock, $0.001 par value;
5,000,000 shares authorized and 419,859 and 419,859 shares issued
and outstanding at December 31, 2019 and 2018, respectively, with a liquidation preference of $625,590 and $625,590 at
December 31, 2019 and December 31, 2018, respectively.
Series C Convertible Preferred stock, $0.001 par value per share;
44,000 shares designated; zero and zero
issued and outstanding at December 31, 2019 and 2018, respectively with a liquidation preference of zero and zero at
December 31, 2019 and December 31, 2018, respectively.
420
420
—
—
Common stock, $0.001 par value per share;
750,000,000 shares authorized; 43,395,563 and 40,174,821
issued and outstanding at December 31, 2019 and 2018, respectively.
Additional paid-in capital
Accumulated deficit
Total Vertex Energy, Inc. stockholders' equity
Non-controlling interest
Total Equity
43,396
81,527,351
(59,246,514)
22,324,653
777,373
23,102,026
TOTAL LIABILITIES, TEMPORARY EQUITY AND EQUITY
$
120,759,919 $
See accompanying notes to the consolidated financial statements
F-5
40,175
75,131,122
(47,800,886)
27,370,831
1,438,213
28,809,044
84,160,408
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, 2019 and 2018
Revenues
Cost of revenues (exclusive of depreciation and amortization shown separately below)
Gross profit
2019
$
163,365,565 $
134,777,113
28,588,452
2018
180,720,661
151,314,039
29,406,622
Operating expenses:
Selling, general and administrative expenses
Depreciation and amortization
Total operating expenses
Income (loss) from operations
Other income (expense):
Other income
Gain (loss) on sale of assets
Gain (loss) on change in value of derivative warrant liability
Interest expense
Total other expense
Loss before income taxes
Income tax benefit
Net loss
Net income (loss) attributable to non-controlling interest and redeemable non-controlling interest
Net loss attributable to Vertex Energy, Inc.
Accretion of redeemable noncontrolling interest to redemption value
Accretion of discount on series B and B-1 Preferred Stock
Dividends on series B and B-1 Preferred Stock
Net loss available to common stockholders
Loss per common share
Basic
Diluted
Shares used in computing loss per share
Basic
Diluted
See accompanying notes to the consolidated financial statements
F-6
24,182,407
7,180,089
31,362,496
(2,774,044)
920,197
(74,111)
(487,524)
(3,070,071)
(2,711,509)
(5,485,553)
—
(5,485,553)
(436,974)
(5,048,579)
(2,279,371)
(2,489,722)
(1,627,956)
(11,445,628) $
21,927,264
6,991,010
28,918,274
488,348
659
45,553
763,716
(3,281,855)
(2,471,927)
(1,983,579)
—
(1,983,579)
234,188
(2,217,767)
—
(3,132,414)
(2,687,123)
(8,037,304)
(0.28) $
(0.28) $
(0.23)
(0.23)
40,988,946
40,988,946
35,411,264
35,411,264
$
$
$
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, 2019 AND 2018
Common Stock
Series A Preferred
Series C Preferred
Shares
$.001 Par
Shares
$.001 Par
Shares
$.001 Par
Additional Paid-in
Capital
Retained
Earnings
Non-
controlling
Interest
Total Equity
32,658,176 $
32,658
453,567 $
454
31,568 $
32 $
67,768,509 $ (39,816,300) $
399,005 $ 28,384,358
—
—
166,630
167
—
32,149
—
241
—
33
—
—
—
—
—
—
—
—
—
—
—
—
—
—
33,708
34
(33,708)
(34)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
52,718
(52,718)
—
313,097
(2,687,123)
—
(2,373,859)
—
(1,960,013)
—
(1,960,013)
99,629
(36,700)
—
62,962
659,836
—
—
—
—
—
—
—
659,836
—
—
—
—
—
—
—
(31,568)
(32)
(3,125)
3,156,800
3,157
3,977,117
3,976
—
—
150,000
—
150
—
—
—
—
—
—
—
—
—
—
40,174,821
40,175
419,859
420
—
—
—
—
—
—
1,642,317
1,642
—
78,425
—
—
79
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
6,200,326
(1,135,701)
—
5,068,601
—
—
857,738
857,738
92,850
—
—
93,000
—
(2,217,767)
234,188
(1,983,579)
75,131,122
(47,800,886)
1,438,213
28,809,044
—
(1,627,956)
—
(1,627,956)
—
(2,169,597)
—
(2,169,597)
2,560,373
(320,125)
—
2,241,890
642,840
6,996
—
—
—
—
—
642,840
—
7,075
(285,534)
(285,534)
—
—
—
—
—
—
—
(2,217,703)
—
(2,217,703)
—
—
1,500,000
1,500
—
—
—
—
—
—
—
—
—
—
—
—
—
—
970,809
2,215,211
—
—
—
970,809
—
2,216,711
—
(5,110,247)
(375,306)
(5,485,553)
43,395,563 $ 43,396
419,859 $
420
— $
— $
81,527,351 $ (59,246,514) $
777,373 $ 23,102,026
See accompanying notes to the consolidated financial statements
F-7
Balance on December 31,
2017
Correction of non-controlling
interest
Dividends and Series B and
B1 Preferred Stock
Accretion of discount on
Series B and B1 Preferred
Stock
Conversion of Series B
Preferred stock to common
Share based compensation
expense, total
Exercise of options to
common
Conversion of Series A
Preferred stock to common
Conversion of Series C
Preferred Stock to common
Conversion of Series B1
Preferred stock to common
Fixed assets contributed by
noncontrolling interest
Issue of common stock from
Nickco contingent
consideration
Net income (loss)
Balance on December 31,
2018
Dividends on Series B and
B1 Preferred Stock
Accretion of discount on
Series B and B1 Preferred
Stock
Conversion of B1 Preferred
Stock to common
Share based compensation
expense, total
Exercise of options to
common
Distribution to noncontrolling
Adjustment of redeemable
noncontrolling interest to
redemption value
Adjustment of carrying
amount of noncontrolling
interest
Issue of common stock and
warrants
Net loss
Balance on
December 31, 2019
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, 2019 AND 2018
Cash flows from operating activities
Net loss
Adjustments to reconcile net loss to cash provided by (used in) operating activities:
2019
2018
$
(5,485,553) $
(1,983,579)
Stock-based compensation expense
Depreciation and amortization
Reduction in allowance for bad debt
Gain on commodity derivative contracts
Net cash settlement on commodity derivatives
Gain on sale of assets
Gain on disposition
Amortization of debt discount and deferred costs
Deferred federal income tax
Decrease in fair value of derivative liability
Reduction in contingent consideration
Impairment of goodwill
Changes in operating assets and liabilities:
Accounts receivable
Inventory
Prepaid expenses
Accounts payable
Accrued expenses
Other assets
Net cash provided by operating activities
Cash flows from investing activities
Internally developed software
Proceeds from the sale of assets
Acquisitions
Purchase of fixed assets
Net cash used in investing activities
Cash flows from financing activities
Line of credit proceeds (payments), net
Proceeds received from issuance of common stock and warrants
Proceeds from exercise of stock options
Distribution VRM LA
Contribution received from redeemable noncontrolling interest
Payments on finance leases
Proceeds from notes payable
Payments made on notes payable
Net cash provided by (used in) financing activities
Net change in cash and cash equivalents and restricted cash
Cash and cash equivalents and restricted cash at beginning of the year
Cash and cash equivalents and restricted cash at end of year
642,840
7,180,089
(320,013)
2,458,359
(2,841,052)
74,111
—
573,908
—
487,524
(15,564)
—
(2,652,864)
1,543,918
(257,894)
(1,171,433)
2,480,786
(223,995)
2,473,167
(489,093)
232,020
—
(3,369,367)
(3,626,440)
(568,406)
2,216,711
7,075
(285,534)
3,150,000
(165,598)
2,809,139
(4,660,120)
2,503,267
1,349,994
2,849,831
$
4,199,825 $
659,836
6,991,010
(299,110)
(1,062,682)
369,188
(45,553)
(241,416)
584,336
—
(763,716)
(128,116)
176,349
2,143,834
(1,786,555)
(597,146)
1,493,324
42,625
(176,342)
5,376,287
—
—
(269,826)
(2,499,117)
(2,768,943)
(746,891)
—
—
—
—
(77,886)
4,024,964
(4,063,487)
(863,300)
1,744,044
1,105,787
2,849,831
See accompanying notes to the consolidated financial statements
F-8
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
SUPPLEMENTAL INFORMATION
Cash paid for interest
Cash paid for income taxes
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 on Series B and B-1 Preferred Stock
Initial adjustment of carrying amount of redeemable noncontrolling interest
Accretion of discount on Series B and B-1 Preferred Stock
Accretion of redeemable noncontrolling interest to redemption value
Equipment acquired under capital leases
Contributed assets Vertex Recovery Management LA from non-controlling interest
Common restricted shares for Nickco acquisition
$
$
$
$
$
$
$
$
$
$
$
2,505,852 $
2,722,542
— $
— $
2,560,373 $
1,627,956 $
970,809 $
2,489,722 $
2,279,371 $
621,000 $
— $
— $
—
34
6,613,052
2,687,123
—
3,132,414
—
450,098
857,738
93,000
See accompanying notes to the consolidated financial statements
F-9
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
VERTEX ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
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 15 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 segments are comprised of Black Oil, Refining and Marketing, and
Recovery.
Black Oil
Through its Black Oil segment, which has been operational since 2001, Vertex Energy aggregates and sells used motor oil. The Company has a network of
approximately 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 (when such use makes economic sense) and a higher-value feedstock for further processing. The finished product can then
be sold by barge as a fuel oil cutterstock and a feedstock component for major refineries. Through the operations at our Marrero, Louisiana facility, we produce a
Vacuum Gas Oil (VGO) product from used oil re-refining which is then sold via barge to end users to utilize in a refining process or a fuel oil blend. Through the
operations at our Columbus, Ohio facility, the ownership of 65% of which was transferred to Tensile in connection with the Heartland SPV (discussed below
under “Note 19. Subsequent Events ” - “Heartland Share Purchase and Subscription Agreement ”), effective January 1, 2020, 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 segment, 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.
Recovery
Through its Recovery segment, which has been operational since 2002, Vertex Energy generates solutions for the proper recovery and management of
hydrocarbon streams. 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 commodities.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
F-10
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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.
Vertex Refining, LA, LLC which owned a used oil re-refinery based in Marrero, Louisiana and also has assets in Belle Chasse, Louisiana, prior to the
consummation of the MG Share Purchase in July 2019, as discussed below under “Note 6. Acquisitions and Dispositions” - “Myrtle Grove Share Purchase
and Subscription Agreement.
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.
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 with collection branches located in Norwalk, Ohio, Zanesville, Ohio, Ravenswood, West Virginia, and Mt. Sterling, Kentucky. Effective
January 1, 2020, the ownership of 65% of the assets of Vertex OH, LLC were transferred to Tensile in connection with the Heartland SPV (discussed
below under “Note 19. Subsequent Events ” - “Heartland Share Purchase and Subscription Agreement”).
Vertex Refining Myrtle Grove LLC (“MG SPV”), is a special purpose entity formed to hold the Belle Chasse, Louisiana, re-refining complex, which entity is
84.42% owned by Vertex Operating.
Vertex Energy Operating, LLC (" Vertex Operating"), is a holding company for various of the subsidiaries described above.
Cash and Cash Equivalents and Restricted Cash
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the consolidated balance sheets to the same such
amounts shown in the consolidated statements of cash flows.
Cash and cash equivalents
Restricted cash
Cash and cash equivalents and restricted cash as shown in the consolidated statements of
cash flows
December 31, 2019
December 31, 2018
$
$
4,099,655 $
100,170
4,199,825 $
1,249,831
1,600,000
2,849,831
F-11
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The Company has placed $100,000 of restricted cash in a money market account, to serve as collateral for payment of a credit card.
In November 2018, we placed $1.5 million into an account in order to receive a letter of credit to serve as collateral for acquiring products. The transaction did not
materialize and the full amount was released to us and received in February 2019. The amount is recorded as part of restricted cash in our 2018 consolidated
balance sheet.
Accounts Receivable
Accounts receivable represents amounts due from customers. Accounts receivable are recorded at invoiced amounts, net of reserves and allowances, do not
bear interest and are not collateralized. The Company uses its best estimate to determine the required allowance for doubtful accounts based on a variety of
factors, including the length of time receivables are past due, economic trends and conditions affecting its customer base, significant one-time events and
historical write-off experience. Specific provisions are recorded for individual receivables when we become aware of a customer’s inability to meet its financial
obligations. The Company reviews the adequacy of its reserves and allowances quarterly.
Receivable balances greater than 90 days past due are individually reviewed for collectability and if deemed uncollectible, are charged off against the allowance
accounts after all means of collection have been exhausted and the potential for recovery is considered remote. The allowance was $402,475 and $831,768 at
December 31, 2019 and 2018, 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 major maintenance and repairs to expenses, and to capitalize expenditures for major
replacements and betterments.
Internal-Use Software
We incur costs related to internal-use software and cloud computing development, including purchased software and internally-developed software. Costs
incurred in the planning and evaluation stage of internally-developed software and cloud computing development are expensed as incurred. Costs incurred and
accumulated during the application development stage are capitalized and included within intangibles, net on the consolidated balance sheets. Amortization of
internal-use software will be recorded on a straight-line basis over the estimated useful life of the assets.
Cloud Computing Costs
We have entered into non-cancellable cloud computing hosting arrangements for which we incur implementation costs. Costs incurred in the planning and
evaluation stage of the cloud computing hosting arrangement are expensed as incurred. Costs incurred during the application development stage related to
implementation of the hosting arrangement are capitalized and included within prepaid expenses on the consolidated balance sheets. Amortization of
implementation costs is recorded on a straight-line basis over the term of the associated hosting arrangement for each module or component of the related
hosting arrangement when it is ready for its intended use. Amortization costs will be recorded primarily in selling, general and administrative expense on the
consolidated statements of operations.
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
F-12
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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 or an impairment.
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 Financial Accounting Standards Board Accounting Standards Codification (“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. For the years ended December 31, 2019 and 2018, goodwill impairment was $0 and $176,349, respectively.
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 the purchase price for certain of 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 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.
F-13
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Our Level 2 liabilities include our marked to market changes in the estimated value of our open derivative contracts held at the balance sheet date.The Company
estimates the fair values of the crude oil swaps and collars based on published forward commodity price curves for the underlying commodity as of the date of
the estimate for which published forward pricing is readily available. The determination of the fair values above incorporates various factors including the impact
of the Company's non-performance risk and the credit standing of the counterparty involved in the Company's derivative contracts. In addition, the Company
routinely monitors the creditworthiness of its counterparty.
Our Level 3 liabilities include our marked to market changes in the estimated value of our derivative warrants issued in connection with our Series B Preferred
Stock and Series B1 Preferred Stock.
Nonfinancial assets and liabilities measured at fair value on a nonrecurring basis include certain nonfinancial assets and liabilities as may be acquired in a
business combination and thereby measured initially at fair value.
Debt Issuance Costs
The Company follows the accounting guidance of ASC 835-30, Interest-Imputation of Interest, which requires that debt issuance costs related to a recognized
debt liability be reported on the Consolidated Balance Sheet as a direct reduction from the carrying amount of that debt liability.
Revenue Recognition
We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the
contract has commercial substance and collectability of consideration is probable. Revenue is recognized when our performance obligations under the terms of a
contract with our customers are satisfied. Recognition occurs when the Company transfers control by completing the specified services at the point in time the
customer benefits from the services performed or once our products are delivered. Revenue is measured as the amount of consideration we expect to receive in
exchange for completing our performance obligations. Sales tax and other taxes we collect with revenue-producing activities are excluded from revenue. In the
case of contracts with multiple performance obligations, the Company allocates the transaction price to each performance obligation based on the relative stand-
alone selling prices of the various goods and/or services encompassed by the contract. We do not have any material significant payment terms, as payment is
generally due within 30 days after the performance obligation has been satisfactorily completed. The Company has elected the practical expedient to recognize
the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that we otherwise would have recognized is one
year or less. In applying the guidance in Topic 606, there were no judgments or estimates made that the Company deems significant.
The nature of the Company's contracts give rise to certain types of variable consideration. The Company estimates the amount of variable consideration to
include in the estimated transaction price based on historical experience, anticipated performance and its best judgment at the time and to the extent it is
probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved.
From time to time, our fuel oil customers in our black oil segment may request that we store product at our facilities which they purchase from us. We recognize
revenues for these “bill and hold” sales once the following criteria have been met: (1) there is a substantive reason for the arrangement, (2) the product is
segregated and identified as the customer's asset, (3) the product is ready for delivery to the customer, and (4) we cannot use the product or direct it to another
customer.
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.
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 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.
F-14
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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, deferred tax assets, and redemption value of
noncontrolling interest.
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, 2019 and 2018.
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 balance sheet. 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. Until all net operating losses are utilized, there is no impact on the 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 Company recognizes and measures a tax benefit from uncertain tax positions when it is more likely than not that the tax position will be sustained on
examination by the taxing authorities, based on the technical merits of the position. The Company recognizes a liability for unrecognized tax benefits resulting
from uncertain tax positions taken or expected to be taken in a tax return. The Company adjusts these liabilities when its judgment changes as a result of the
evaluation of new information not previously available. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that
is materially different from the current estimate or future recognition of an unrecognized benefit. These differences will be reflected as increases or decreases to
income tax expense in the period in which they are determined.
The Company recognizes interest and penalties related to unrecognized tax benefits within the income tax expense line in the consolidated statements of
operations. Accrued interest and penalties are included within deferred taxes, unrecognized tax benefits and other long-term liabilities line in the consolidated
balance sheet.
F-15
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Derivative Transactions
All derivative instruments are recorded on the accompanying balance sheets at fair value. These derivative transactions are not designated as cash flow hedges
under FASB ASC 815, Derivatives and Hedges. Accordingly, these derivative contracts are marked-to-market and any changes in the estimated value of
derivative contracts held at the balance sheet date are recognized in the accompanying statements of operations as net gain or loss on derivative contracts. The
derivative assets or liabilities are classified as either current or noncurrent assets or liabilities based on their anticipated settlement date. The Company nets
derivative assets and liabilities for counterparties where it has a legal right of offset.
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 in earnings. To derive an estimate of the fair value of
these warrants, a Dynamic Black Scholes model is utilized which 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, our quoted 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 and Series B1
Preferred Stock if the redemption would not be subject to the existing restrictions under the Company's senior credit agreement and if the Company is not
prohibited from completing such redemption under Nevada law. 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 stock-based expense and activity in accordance with FASB ASC Topic 718, which establishes accounting for equity instruments
exchanged for services. Under this topic, stock-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
Basic earnings per share 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 years ended December 31, 2019 and December 31, 2018,
respectively, includes the weighted average of common shares outstanding. 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. 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.
Contingent Consideration
F-16
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
During the year ended December 31, 2019, the Company wrote off and recognized in income the remaining portion of the contingent consideration related to the
July 2017 Ygriega Environmental Services, LLC ("Ygriega") acquisition earn-out due to the fact that collected oil gallons targets required for the payout of such
earn-out, were not met.
Other Income
During the year ended December 31, 2019, the Company received a payment of $ 907,500 related to the proceeds of an insurance settlement for a fire that had
occurred at the used oil re-refining plant located in Churchill County, Nevada, which we previously rented. The insurance settlement satisfies a previous loan we
made to Omega Refining, LLC to fund operating expenses at that facility. The Company previously determined this loan was uncollectible and wrote it off.
Redeemable Noncontrolling Interest
As more fully described in " Note 6. Myrtle Grove Share Purchase and Subscription Agreement ", the Company is party to a put/call option agreement with the
holder of MG SPV’s non-controlling interest. The put option permits the MG SPV's non-controlling interest holder, at any time on or after the earlier of (a) July 26,
2024 and (ii) the occurrence of certain triggering events (a “MG Redemption”) to require MG SPV to redeem the non-controlling interest from the holder of such
interest. Per the agreement, the cash purchase price for such redeemed Class B Units is the greater of (y) the fair market value of such units (without discount for
illiquidity, minority status or otherwise) as determined by a qualified third party agreed to in writing by a majority of the holders seeking an MG Redemption and
Vertex Operating (provided that Vertex Operating still owns Class A Units on such date) and (z) the original per-unit price for such Class B Units plus fifty percent
(50%) of the aggregate capital invested by the Class B Unit holders through such MG Redemption date. The agreement also permits the Company to acquire
the non-controlling interest from the holder thereof upon certain events. Applicable accounting guidance requires an equity instrument that is redeemable for cash
or other assets to be classified outside of permanent equity if it is redeemable (a) at a fixed or determinable price on a fixed or determinable date, (b) at the option
of the holder, or (c) upon the occurrence of an event that is not solely within the control of the issuer. Distributions of available cash of MG SPV pursuant to the
MG Company Agreement (including pursuant to liquidations of MG SPV), subject to certain exemptions and exemptions set forth therein, are to be made (a) first,
to the holders of the Class B Units, in an amount equal to the greater of (A) the aggregate unpaid “Class B Yield” (equal to an annual return of22.5% per annum)
and (B) an amount equal to fifty percent (50%) of the aggregate capital invested by the Class B Unit holders (initially Tensile-MG)(such aggregate capital
invested by the Class B Unit holders, the “MG Invested Capital”, which totals $3 million as of the Closing Date), less prior distributions (the greater amount of (A)
and (B), the “Class B Priority Distributions”); (b) second, the Class B Unitholders, together as a separate and distinct class, are entitled to receive an amount
equal to the aggregate MG Invested Capital; (c) third, the Class A Unitholders (other than Class A Unitholders which received Class A Units upon conversion of
Class B Units), together as a separate and distinct class, are entitled to receive all or a portion of any distribution equal to the sum of all distributions made under
sections (a) and (b) above; and (d) fourth, to the holders of Units who are eligible to receive such distributions in proportion to the number of Units held by such
holders.Based on this guidance, the Company has classified the MG SPV non-controlling interest between the liabilities and equity sections of the accompanying
December 31, 2019 and December 31, 2018 consolidated balance sheets. If an equity instrument subject to the guidance is currently redeemable, the instrument
is adjusted to its maximum redemption amount at the balance sheet date. If the equity instrument subject to the guidance is not currently redeemable but it is
probable that the equity instrument will become redeemable (for example, when the redemption depends solely on the passage of time), the guidance permits
either of the following measurement methods: (a) accrete changes in the redemption value over the period from the date of issuance (or from the date that it
becomes probable that the instrument will become redeemable, if later) to the earliest redemption date of the instrument using an appropriate methodology, or
(b) recognize changes in the redemption value immediately as they occur and adjust the carrying amount of the instrument to equal the redemption value at the
end of each reporting period. The amount presented in temporary equity should be no less than the initial amount reported in temporary equity for the instrument.
Because the MG SPV equity instrument will become redeemable solely based on the passage of time, the Company determined that it is probable that the MG
SPV equity instrument will become redeemable. The Company has elected to apply the second of the two measurement options described above. An adjustment
to the carrying amount of a non-controlling interest from the application of the above guidance does not impact net income in the consolidated financial
statements. Rather, such adjustments are treated as equity transactions.
New Accounting Pronouncements
Leases
F-17
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02 (ASU 2016-02), Leases (Topic 842). ASU 2016-02 requires companies to
recognize lease assets and lease liabilities on the balance sheet and disclose key information about leasing arrangements. We adopted ASU 2016-02, Leases
(Topic 842) effective January 1, 2019 and did not recast comparative periods in transition to the new standard. In addition, we elected certain
practical expedients which permit us to not reassess whether existing contracts are or contain leases, to not reassess the lease classification of any existing
leases, to not reassess initial direct costs for any existing leases, and to not separate lease and nonlease components for all classes of underlying assets. We
also made an accounting policy election to keep leases with an initial term of 12 months or less off of the balance sheet for all classes of underlying assets.
Adoption of the new standard resulted in an increase in the Company’s assets and liabilities of approximately $37.8 million on January 1, 2019. The ASU did not
have an impact on our consolidated results of operations or cash flows. Additional information and disclosures required by this new standard are contained in
"Note 18. Leases".
Internal Use Software and Cloud Computing Costs
We adopted the guidance in ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40) -Customer's Accounting for
Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, on January 1, 2019. This ASU requires entities in a hosting
arrangement that is a service contract to follow the guidance in Subtopic 350-40, Internal-Use Software, to determine which costs to implement the service
contract would be capitalized as an asset related to the service contract and which costs would be expensed. The requirements of ASU 2018-15 have been
applied on a prospective basis to implementation costs incurred on or after January 1, 2019. As a result of the adoption of ASU 2018-15, we capitalized $0.7
million of implementation costs for the year ended December 31, 2019. We have not recognized any amortization related to these implementation costs for the
year ended December 31, 2019.
NOTE 3. REVENUES
Disaggregation of Revenue
The following table presents our revenues disaggregated by revenue source:
Primary Geographical Markets
Northern United States
Southern United States
Sources of Revenue
Petroleum products
Metals
Total revenues
Year ended December 31, 2019
Black Oil
Refining &
Marketing
Recovery
Total
$
$
$
$
42,195,020 $
— $
— $
42,195,020
97,074,144
12,957,767
11,138,634
121,170,545
139,269,164 $
12,957,767 $
11,138,634 $
163,365,565
139,269,164 $
12,957,767 $
2,666,077 $
154,893,008
—
—
8,472,557
8,472,557
139,269,164 $
12,957,767 $
11,138,634 $
163,365,565
F-18
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Primary Geographical Markets
Northern United States
Southern United States
Sources of Revenue
Petroleum products
Metals
Total revenues
Year ended December 31, 2018
Black Oil
Refining &
Marketing
Recovery
Total
$
$
$
$
41,207,747 $
— $
— $
41,207,747
102,629,234
22,935,482
13,948,198
139,512,914
143,836,981 $
22,935,482 $
13,948,198 $
180,720,661
143,836,981 $
22,935,482 $
1,960,915 $
168,733,378
—
—
11,987,283
11,987,283
143,836,981 $
22,935,482 $
13,948,198 $
180,720,661
Petroleum products- We derive a majority of our revenues from the sale of recovered/re-refined petroleum products, which include Base Oil, VGO (Vacuum Gas
Oil), Pygas, Gasoline, Cutterstock and Fuel Oils.
Metals- Consist of recoverable ferrous and non-ferrous recyclable metals from manufacturing and consumption. Scrap metal can be recovered from pipes,
barges, boats, building supplies, surplus equipment, tanks, and other items consisting of metal composition. These materials are segregated, processed, cut-up
and sent back to a steel mill for re-purposing.
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, 2019 and 2018, 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, 2019 and 2018, the Company’s revenues and receivables were comprised of the following customer concentrations:
Customer 1
Customer 2
Customer 3
Customer 4
2019
2018
% of
Revenues
% of
Receivables
% of
Revenues
% of
Receivables
40%
8%
9%
3%
36%
14%
—%
7%
34%
—%
11%
4%
21%
—%
—%
13%
At December 31, 2019 and 2018, and for the years then ended, the Company's segment revenues were comprised of the following customer concentrations:
% of Revenue by Segment 2019
% of Revenue by Segment 2018
Black Oil
Refining
Recovery
Black Oil
Refining
Recovery
Customer 1
Customer 2
Customer 3
Customer 4
47%
10%
10%
4%
—%
—%
—%
—%
43%
—%
14%
5%
—%
—%
—%
—%
—%
—%
—%
—%
—%
—%
—%
—%
F-19
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The Company had no vendors that represented 10% or more of total purchases or payables for the years ended December 31, 2019 and 2018.
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.
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 or have recently resolved, 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.
Related Parties
The Company has a Related Party Transaction committee including at least two independent directors who review and pre-approve all related party transactions.
From time to time, the Company consults with a related party law firm. During the years ended December 31, 2019 and 2018, we paid $100,683 and $40,707,
respectively, to such law firm for services rendered.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
NOTE 5. FIXED ASSETS, NET
Fixed assets consist of the following:
Equipment
Furniture and fixtures
Leasehold improvements
Office equipment
Vehicles
Building
Construction in progress
Land
Total fixed assets
Less accumulated depreciation
Net fixed assets
Useful Life
(in years)
December 31, 2019 December 31, 2018
7-20
$
42,879,308 $
40,404,582
7
15
5
5
20
108,896
2,434,690
1,213,865
7,114,001
274,203
12,361,034
3,083,551
69,469,548
(24,708,151)
108,896
2,331,071
1,190,509
6,899,388
274,203
12,720,188
2,833,551
66,762,388
(19,874,896)
$
44,761,397 $
46,887,492
Depreciation expense was $5,189,331 and $5,166,467 for the years ended December 31, 2019 and 2018, respectively.
Construction in progress is related to 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 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. ACQUISITIONS AND DISPOSITIONS
Specialty Environmental Services
On April 30, 2018, the Company entered into and closed an Asset Purchase Agreement with Specialty Environmental Services ("SES") pursuant to which the
Company agreed to buy substantially all of SES's customer relations, vehicles, equipment, supplies and tools in Texas for an aggregate purchase price of
$269,826. We recognized the consideration in tangible and intangible assets as of the purchase date.
Myrtle Grove Share Purchase and Subscription Agreement
On July 26, 2019 (the “MG Closing Date”), Vertex Refining Myrtle Grove LLC, a Delaware limited liability company, which entity was formed as a special purpose
vehicle in connection with the transactions, described in greater detail below (“MG SPV”), Vertex Operating, Tensile-Myrtle Grove Acquisition Corporation
(“Tensile-MG”), an affiliate of Tensile Capital Partners Master Fund LP, an investment fund based in San Francisco, California (“ Tensile”), and solely for the
purposes of the MG Guaranty (defined below), we entered into and closed the transactions contemplated by a Share Purchase and Subscription Agreement (the
“MG Share Purchase”).
Prior to entering into the MG Share Purchase, Vertex Operating’s wholly-owned subsidiary, Vertex Refining LA, LLC (“ Vertex LA”), transferred all of the operating
assets owned by it and related to the planned development of the MG Refinery (as defined
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
below), which the parties agreed had a fair market value of $22,666,667, to MG SPV in consideration for 21,667 Class A Units and 1,000 Class B Units of MG
SPV, which units were distributed to Vertex Operating. At the closing of the MG Share Purchase (on the MG Closing Date), Vertex Operating sold 1,000 of the
Class B Units to Tensile-MG for consideration of $1 million and Tensile-MG, purchased an additional 3,000 Class B Units directly from MG SPV for $3 million
(less Tensile’s fees and expenses incurred in connection with the transaction of $850,000).
As a result of the transaction, Tensile, through Tensile-MG, acquired an approximate 15.58% ownership interest in MG SPV, which in turn now owns the
Company’s Belle Chasse, Louisiana, re-refining complex (the “MG Refinery”).
We, as required, used all proceeds we received from the sale of the Class B Units to pay down the EBC Credit Agreement (defined and described under “ Note 9.
Line of Credit and Long-Term Debt”). Amounts received by MG SPV from its direct sale of Class B Units to Tensile-MG may only be used for additional
investments in the MG refinery or for day to day operations at the MG Refinery. At December 31, 2019, $1.7 million reported as cash and cash equivalents on
the balance sheet is restricted to MG Refinery investments or operating expenses.
The MG Share Purchase includes customary representations and warranties and requires Myrtle-Grove SPV to indemnify Tensile-MG (and its related parties),
Vertex Operating to indemnify Tensile-MG (and its related parties), and Tensile-MG to indemnify the Company (and its related parties), against various matters
(subject to minimum losses being incurred by Myrtle-Grove SPV (and its related parties, as applicable) of $226,000 and a maximum liability by Myrtle-Grove SPV
for all losses of Myrtle-Grove SPV of $3,400,000, subject to certain exceptions). Additionally, Myrtle-Grove SPV’s maximum indemnification liability under the
agreement is not to exceed $4 million, except in the case of fraud, intentional misrepresentation or criminal activity.
The MG Share Purchase also provided for a guarantee by the Company to Tensile-MG of the payment obligations of Myrtle-Grove SPV and Vertex Operating as
set forth in the MG Share Purchase, including the indemnification rights summarized above (the “MG Guaranty”).
In connection with the closing of the MG Share Purchase, MG SPV, Vertex Operating and the Company entered into an environmental remediation and
indemnity agreement, whereby we agreed to indemnify and hold Tensile-MG harmless against certain potential environmental liabilities.
As discussed above, after the consummation of the transactions set forth in the MG Share Purchase, MG SPV is owned 84.42% by Vertex Operating and
15.58% by Tensile-MG. The Class B Units held by Tensile-MG are convertible into Class A Units at the option of Tensile-MG, as provided in the Limited Liability
Company Agreement of MG SPV dated July 25, 2019 (the “MG Company Agreement”), based on a conversion price (initially one-for-one) which may be reduced
from time to time if new Units of MG SPV are issued, and automatically convert into Series A Units upon certain events described in the MG Company
Agreement.
Additionally, the Class B Unit holders may force MG SPV to redeem the outstanding Class B Units at any time on or after the earlier of (a) July 26, 2024 and
(ii) the occurrence of a Triggering Event (defined below)(an “MG Redemption”). The cash purchase price for such redeemed Class B Units is the greater of (y) the
fair market value of such units (without discount for illiquidity, minority status or otherwise) as determined by a qualified third party agreed to in writing by a
majority of the holders seeking an MG Redemption and Vertex Operating (provided that Vertex Operating still owns Class A Units on such date) and (z) the
original per-unit price for such Class B Units plus fifty percent (50%) of the aggregate capital invested by the Class B Unit holders through such MG Redemption
date. “Triggering Events” mean (a) any dissolution, winding up or liquidation of the Company, Vertex Operating or any significant subsidiary of Vertex Operating,
(b) any sale, lease, license or disposition of any material assets of the Company, Vertex Operating or any significant subsidiary of Vertex Operating, (c) any
transaction or series of related transactions (whether by merger, exchange, contribution, recapitalization, consolidation, reorganization, combination or
otherwise) involving the Company, Vertex Operating or any significant subsidiary of Vertex Operating, the result of which is that the holders of the voting
securities of the relevant entity as of the MG Closing Date are no longer the beneficial owners, in the aggregate, after giving effect to such transaction or series
of transactions, directly or indirectly, of more than fifty percent (50%) of the voting power of the outstanding voting securities of the entity, subject to certain other
requirements set forth in the MG Company Agreement, (d) the failure to consummate the Heartland Closing (defined below) by June 30, 2020 (a “Failure to
Close”), (e) the failure of Vertex Operating to operate MG SPV in good faith with appropriate resources, or (f) the material failure of the Company and its affiliates
to comply with the terms of the contribution agreement, whereby the Company contributed assets and operations to MG SPV.
On or after the third anniversary of the MG Closing Date, the Company or any of its subsidiaries, may elect to purchase all of the outstanding units of MG SPV
held by Tensile-MG (or any assignee of Tensile-MG) as discussed in the MG Company Agreement.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
On the MG Closing Date, and as a required term of the closing of the MG Share Purchase, Tensile entered into a Subscription Agreement dated July 25, 2019,
and effective on July 26, 2019, in favor of the Company (the “Subscription Agreement”), pursuant to which it subscribed to purchase (a) 1,500,000 shares of our
common stock (the “Tensile Shares”), and (b) warrants to purchase 1,500,000 shares of our common stock, which were documented by a Common Stock
Purchase Warrant (the “Warrants” and the shares of common stock issuable upon exercise thereof, the “ Warrant Shares ”) in consideration for $2.22 million or
$1.48 per share and warrant.
The Warrants have an exercise price of $2.25 per share and a term of ten years. The Warrants also include a beneficial ownership limitation which prohibits
Tensile from exercising any Warrants, if upon such exercise, Tensile, together with its affiliates, would, subject to limited exceptions, beneficially own in excess of
4.999% of the number of shares of our common stock outstanding immediately after the exercise. Tensile may elect to change this beneficial ownership limitation
from 4.999% to up to 9.999% of the number of shares of our common stock outstanding immediately after the exercise upon 61 days’ prior written notice to us.
In connection with the subscription, we and Tensile entered into a Registration Rights and Lock-Up Agreement dated July 25, 2019 (the “ Lock-Up Agreement”),
pursuant to which we agreed to use commercially reasonable efforts to register the Tensile Shares and Warrant Shares prior to the end of the Initial Lock-Up
(defined below) and Tensile agreed to not sell any of the Tensile Shares or Warrant Shares for a period of one year following the MG Closing Date (the “Initial
Lock-Up”) and to sell no more than 300,000 of such Tensile Shares and Warrant Shares in any 90 day period during the four years thereafter (the “Volume
Limitations”), each, subject to certain exceptions set forth therein.
The Initial Lock-Up, but not the Volume Limitation, terminates if our common stock is not traded on Nasdaq or a similar market for a period of more than
five
consecutive trading days. Upon any termination of the Initial Lock-Up pursuant to the preceding sentence, in the event Tensile holds any Tensile Shares,
Warrant Shares or any Warrants, we are required to disclose publicly all material nonpublic information disclosed to Tensile prior to the date of such termination.
We also provided Tensile-Heartland Acquisition Corporation (“ Tensile-Heartland”), an affiliate of Tensile, an option (the “Heartland Option”), exercisable at any
time prior to June 30, 2020, to the extent certain pilot studies to be conducted by MG SPV meet the standards of Tensile-Heartland, in its sole discretion, or the
outcome of such studies are waived by Tensile-Heartland, to execute and close (within 30 days from such date of exercise by Tensile-Heartland) the acquisition
of a 65% interest in a special purpose entity which will be formed to hold ownership of our Heartland refinery, similar to what we have done with our Myrtle Grove
facility as discussed above (the "Heartland Transaction"). Under the terms of that transaction, if closed, the Company will retain a 35% stake in the SPV and the
Company will receive $13.5 million of non-recourse cash to its balance sheet. As discussed below under “ Note 19. Subsequent Events ” - “Heartland Share
Purchase and Subscription Agreement”, the Heartland Transaction closed on January 17, 2020.
Redeemable Noncontrolling Interest
As a result of the MG Share Purchase (as defined and discussed above), Tensile, through Tensile-Myrtle Grove Acquisition Corporation, acquired an
approximate 15.58% ownership interest in Vertex Refining Myrtle Grove LLC, a Delaware limited liability company, which entity was formed as a special purpose
vehicle in connection with the transactions. This is considered a redeemable noncontrolling equity interest, as it is redeemable in the future and not solely within
our control.
The initial carrying amount that is recognized in temporary equity for redeemable noncontrolling interests is the initial carrying amount determined in accordance
with the accounting requirements for noncontrolling interests in ASC 810-10. In accordance with ASC 810-10-45-23, changes in a parent’s ownership interest
while the parent retains its controlling financial interest in its subsidiary are accounted for as equity transactions. Therefore, the Company recognized no gain or
loss in consolidated net income and the carrying amount of the noncontrolling interest was adjusted to reflect the change in our ownership interest of the
subsidiary. The difference of $970,809 between the fair value of the consideration received of $ 3,150,000 and the carrying amount of the noncontrolling interest
determined in accordance with ASC 810-10 of $2,179,191, was recognized in additional paid in capital.
After initial recognition, in accordance with ASC 480-10-S99-3A, the Company applied a two-step approach to measure noncontrolling interests at the balance
sheet date. First, the Company applied the measurement guidance in ASC 810-10 by attributing a portion of the subsidiary's net loss of $61,668 to the
noncontrolling interest. Second, the Company applied the subsequent measurement guidance in ASC 480-10-S99-3A, which indicates that the noncontrolling
interest’s carrying amount is the higher of (1) the cumulative amount that would result from applying the measurement guidance in ASC 810-10 in the first step or
(2) the redemption value. Pursuant to ASC 480-10-S99-3A, for a security that is probable of becoming redeemable in the future, the Company adjusted the
carrying amount of the redeemable noncontrolling interests to what would be the redemption value assuming the security was redeemable at the balance sheet
date. This adjustment of $2,279,371 increased the carrying amount of
F-23
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
redeemable noncontrolling interests to the redemption value as of December 31, 2019 of $ 4,396,894. Adjustments to the carrying amount of redeemable
noncontrolling interests to redemption value are reflected in retained earnings.
The table below presents the reconciliation of changes in redeemable noncontrolling interest during the year ended December 31, 2019:
Beginning balance at January 1, 2019
Capital contribution from non-controlling interest
Initial adjustment of carrying amount of non-controlling interest
Net loss attributable to redeemable non-controlling interest
Accretion of non-controlling interest to redemption value
Ending balance at December 31, 2019
$
$
—
3,150,000
(970,809)
(61,668)
2,279,371
4,396,894
Net
Carrying
Amount
610,690
3,122,733
813,018
7,992,157
39,921
NOTE 7. INTANGIBLE ASSETS, NET
Components of intangible assets (subject to amortization) consist of the following items:
December 31, 2019
December 31, 2018
Useful Life
(in years)
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Gross
Carrying
Amount
Accumulated
Amortization
$
1,329,580
$
884,917 $
444,663 $
1,329,580 $
718,890 $
Customer relations
Vendor relations
Trademark/Trade name
TCEP Technology/Patent
Non-compete agreements
Internally developed software in
progress
5-8
10
6-16
15
3-5
3-5
6,654,497
1,249,887
13,287,000
196,601
489,093
4,197,213
2,457,284
531,885
718,002
6,654,497
1,249,887
6,180,643
7,106,357
13,287,000
168,200
28,401
196,601
3,531,764
436,869
5,294,843
156,680
—
489,093
—
—
—
$
23,206,658
$
11,962,858 $
11,243,800 $
22,717,565 $
10,139,046 $
12,578,519
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. Certain internally developed software is expected to
be completed and put into service in the second quarter of 2020.
Total amortization expense of intangibles was $1,823,812 and $1,818,854 for the years ended December 31, 2019 and 2018, respectively.
F-24
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Estimated future amortization expense is as follows:
2020
2021
2022
2023
2024
Thereafter
$
$
1,921,630
1,921,630
1,706,702
1,349,318
1,292,875
3,051,645
11,243,800
We analyzed the goodwill on the books relating to the prior acquisition of Nickco Recycling, Inc. (" Nickco") as of December 31, 2018 to determine whether the
amount should be impaired at year end. Nickco was purchased with anticipated EBITDA to be in excess of $700,000 with the synergies of the two companies.
The EBITDA for the first 12 months after acquisition of Nickco was well below the expected EBITDA. The earnout target for the seller of the business during the
initial 12 months was a range between $392,000 and $567,000; and the achieved results of $334,000 did not meet the lower end of the threshold. Our budgeted
target EBITDA for 2018 at this segment was $461,000 of EBITDA, and the results came in over $1 million short of the target. There were some circumstances
around the operations and downtime that impacted these results. Based on the above financial performance, the Company impaired the remaining goodwill and
recognized a $176,349 goodwill impairment in 2018, which is included in selling, administrative and general expenses and thus eliminated the goodwill balance
in our Recovery segment.
NOTE 8. ACCOUNTS RECEIVABLE
Accounts receivable, net, consists of the following at December 31:
Accounts receivable trade
Allowance for doubtful accounts
Accounts receivable trade, net
2019
2018
$
$
12,540,553 $
(402,475)
12,138,078 $
9,859,758
(831,768)
9,027,990
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.
NOTE 9. LINE OF CREDIT AND LONG-TERM DEBT
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 Holdings, LLC ("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
F-25
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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).
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 interest rate is
14% at December 31, 2019.
The EBC Credit Agreement was to terminate on February 1, 2020, and has since been extended until February 1, 2021, as discussed below, on which date we
are required to repay the outstanding balance owed thereunder and any accrued and unpaid interest thereon.
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, the ownership of 65% of which was transferred to Tensile in connection with the Heartland SPV (discussed below under
“Note 19. Subsequent Events ” - “Heartland Share Purchase and Subscription Agreement ”), effective January 1, 2020, to secure the repayment of outstanding
amounts and agreed to provide mortgages on certain other real property to be delivered post-closing. The post-closing mortgage properties provided were in
Baytown, Pflugerville and Corpus Christi, Texas.
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 borrowing availability under the Revolving
Credit Agreement (defined below) at any time. As of December 31, 2019, the borrowing availability was $3,835,997, and the Company was in compliance with
all covenants thereunder.
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 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.
F-26
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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. At December 31, 2019, the maximum amount available to be borrowed was $3,835,997, based on the
above borrowing base calculation.
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 1.69% 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 month, beginning on the first business day of the first full month
following the closing.
The Revolving Credit Agreement was to terminate on February 1, 2020, but has since been extended until February 1, 2021, as discussed below, on which date
we are required to repay the outstanding balance owed thereunder and any accrued and unpaid interest thereon. Borrowings under a revolving credit agreement
that contain a subjective acceleration clause and also require a borrower to maintain a lockbox with the lender (whereby lockbox receipts may be applied to
reduce the amount outstanding under the revolving credit agreement) are considered short-term obligations. As a result, the debt is classified as a current liability
at December 31, 2019.
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, the ownership of 65% of which was transferred to Tensile in connection with the Heartland SPV (discussed below under “Note 19.
Subsequent Events” - “Heartland Share Purchase and Subscription Agreement” ), effective January 1, 2020, to secure the repayment of outstanding amounts.
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 borrowing availability (reduced to
$2.0 million pursuant to the amendments described below) under the Revolving Credit Agreement in any 30 day period. During the year ended December 31,
2019, the Company was not in compliant with the capital expenditure limitation; however, a waiver was obtained.
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.
The balance of the EBC Credit Agreement and the Revolving Credit Agreement as of December 31, 2019 are $13,333,000 and $ 3,276,230, respectively.
Credit Agreement Amendments
On July 25, 2019, (a) EBC, the EBC Lenders, and Vertex Operating, entered into a Third Amendment and Limited Waiver to Credit Agreement, effective on July
26, 2019, pursuant to which the EBC Lenders agreed to amend the EBC Credit Agreement; and (b) the EBC Lenders and Vertex Operating entered into a Third
Amendment and Limited Waiver to ABL Credit Agreement, effective on July 26, 2019, pursuant to which the EBC Lenders agreed to amend the Revolving Credit
Agreement (collectively, the “Waivers”).
F-27
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The Waivers amended the credit agreements to: extend the due date of amounts owed thereunder from February 1, 2020 to February 1, 2021; to increase the
amount of permitted indebtedness allowable thereunder from $500,000 to $750,000; to increase the amount of capital expenditures we are authorized to make in
fiscal 2019 from $3.0 million to $3.5 million, and to set the amount of capital expenditures we are authorized to make in fiscal 2020 and thereafter at $3.0 million;
and to decrease the minimum amount of availability required under the credit agreements to $1.5 million at any time from July 26, 2019 to August 31, 2019, and
$2.0 million at any time thereafter. The Waivers also provided for waivers by the lenders of certain restrictions in the credit agreements which would have
prevented us from consummating the MG Share Purchase and Heartland Share Purchase Agreement (discussed below under “Note 19. Subsequent Events ” -
“Heartland Share Purchase and Subscription Agreement ”), subject to certain conditions, including us paying at least $1.1 million to the lenders from the amount
received pursuant to the MG Purchase Agreement (which amount has been paid to date) and at least $7.0 million (unless otherwise agreed by the lenders) of
the amount to be received by us pursuant to terms of the Heartland Purchase Agreement (which amount has been paid to date), to the lenders.
Insurance Premiums
The Company financed insurance premiums through various financial institutions bearing interest rates from 4.00% to 4.90%. All such premium finance
agreements have maturities of less than one year and have a balance of $1,165,172 at December 31, 2019 and $ 999,152 at December 31, 2018.
Finance Leases
On March 1, 2018, the Company obtained one finance lease. Payments are $908 per month for three years and the amount of the finance lease obligation has
been reduced to $12,341 at December 31, 2019.
On May 29, 2018, the Company obtained one finance lease. Payments are $26,305 per quarter for four years and the amount of the finance lease obligation has
been reduced to $264,014 at December 31, 2019.
During April and May 2019, the Company obtained five finance leases. Payments are approximately $ 11,710 per month for five years and the amount of the
finance lease obligation has been reduced to $551,260 at December 31, 2019.
The Company's outstanding debt as of December 31, 2019 and December 31, 2018 is summarized as follows:
Creditor
Loan Type
Origination Date
Maturity Date
Loan Amount
Balance on
December 31, 2019
Balance on
December 31, 2018
Term Loan
February 1, 2017
February 1, 2021
$
20,000,000 $
13,333,000 $
15,350,000
Encina Business
Credit, LLC
Encina Business Credit
SPV, LLC
Wells Fargo Equipment
Lease-VRM LA
Wells Fargo Equipment
Lease-Ohio
Various institutions
Total
Tetra Capital Lease
Finance Lease
May, 2018
May, 2022
Revolving Note
February 1, 2017
February 1, 2021
Finance Lease
March, 2018
March, 2021
Finance Lease
April-May, 2019
April-May, 2024
Insurance premiums
financed
Various
< 1 year
$
2,902,428
$
$
$
$
10,000,000
419,690
3,276,230
264,014
3,844,636
349,822
30,408
12,341
22,390
621,000
551,260
—
1,165,172
18,602,017
(47,826)
999,152
20,566,000
(621,733)
$
18,554,191 $
19,944,267
F-28
Deferred finance costs
Total, net of deferred
finance costs
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Future maturities of debt are summarized as follows:
Creditor
2020
2021
2022
2023
2024
Thereafter
Encina Business Credit, LLC
$
900,000 $
12,433,000 $
Encina Business Credit SPV, LLC
Tetra Capital Lease
Wells Fargo Equipment Lease-VRM LA
Wells Fargo Equipment Lease-Ohio
Various institutions
Totals
Deferred finance costs
3,276,230
91,779
10,537
114,848
1,165,172
—
98,167
1,804
120,895
—
— $
—
74,068
—
— $
— $
—
—
—
—
—
—
127,264
138,476
49,777
—
—
—
5,558,566
12,653,866
201,332
138,476
49,777
(47,826)
—
—
—
—
Totals, net of deferred finance costs
$
5,510,740 $
12,653,866 $
201,332 $
138,476 $
49,777 $
—
—
—
—
—
—
—
—
—
NOTE 10. INCOME TAXES
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a
registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for
certain income tax effects of the Tax Reform Act. We completed our accounting for all of the enactment-date income tax effects of the Tax Reform Act during the
fourth quarter of 2018 with no further changes.
The components of income tax (benefit) expense for the years ended December 31, 2019 and 2018 are as follows:
Current federal tax (expense)/benefit
Deferred federal tax (expense)/benefit
Total federal tax (expense)/benefit
December 31, 2019
December 31, 2018
$
$
(68,606) $
68,606
— $
(137,212)
137,212
—
Reconciliation between the amount determined by applying the U.S. federal income tax rate of 21% to pretax income from continuing operations and income tax
expense presented in the accompanying consolidated statements of operations was as follows for the years ended December 31, 2019 and 2018:
Statutory tax on book income
Permanent differences
Change in derivative liability
Myrtle Grove transaction gain
Change in valuation allowance
Prior year return true up
Income tax expense (benefit)
December 31, 2019
December 31, 2018
$
(1,152,000) $
139,000
102,000
210,000
1,344,000
(643,000)
$
— $
(417,000)
114,000
(160,000)
—
967,000
(504,000)
—
F-29
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The tax effect of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2019 and 2018
are presented below:
Deferred tax assets:
Alternative minimum tax credits
Accrued bonus and stock based compensation
Basis of intangible assets
Bad debt reserve
Contribution carryover
Interest expense carryforward
Net operating loss carry forwards
Less valuation allowance
Total deferred tax assets
Deferred tax liabilities:
Basis of fixed assets
Contingent liability
Partnership income
Total deferred tax liabilities
Net deferred tax assets
December 31, 2019
December 31, 2018
$
69,000 $
386,000
1,687,000
85,000
38,000
487,000
13,682,000
(13,453,000)
$
2,981,000 $
137,000
358,000
1,368,000
175,000
26,000
190,000
12,500,000
(12,109,000)
2,645,000
December 31, 2019
December 31, 2018
$
(2,788,000) $
(2,444,000)
—
(124,000)
3,000
(67,000)
(2,912,000) $
(2,508,000)
69,000 $
137,000
$
$
The Company provides a valuation allowance when it is more likely than not that some portion of the deferred tax assets will not be realized. Management
assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize the existing deferred tax assets.
Based on this evaluation, as of December 31, 2019 and 2018, valuation allowances of approximately $13,453,000 and $ 12,109,000, respectively, has been
recorded to reduce net deferred tax assets to an amount that management believes is more than likely not to be realized.
The Company is subject to examination by Federal and State tax authorities for fiscal years 2016 through 2019, except for utilization of net operating losses.
At December 31, 2019, the Company had federal net operating loss carry-forwards (" NOLs") of approximately $73.1 million acquired as part of the April 2009
merger between World Waste Technologies, Inc. and the Company's wholly-owned subsidiary Vertex Merger Sub, LLC and subsequent operating losses incurred
by the Company. IRC Sections 382 and 383 provide an annual limitation with respect to the ability of a corporation to utilize its tax attributes against future U.S.
taxable income in the event of a change in ownership. The net operating loss carry-forwards at December 31, 2019 reflect a reduction of approximately $31.6
million as a result of an ownership change triggering event in May 2016, as defined under IRC Section 382. The net operating loss carryforward will begin to
expire in 2026. Those arising in tax years after 2017 will never expire.
F-30
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
NOTE 11. STOCK BASED COMPENSATION
The stock based compensation cost that has been charged against income by the Company was $642,840 and $659,836 for the years ended December 31,
2019 and 2018, respectively, for options awarded by the Company.
Stock option activity for the years ended December 31, 2019 and 2018 is 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, 2017
Options granted
Options exercised
Options cancelled/forfeited/expired
Outstanding at December 31, 2018
Vested at December 31, 2018
Exercisable at December 31, 2018
Outstanding at December 31, 2018
Options granted
Options exercised
Options cancelled/forfeited/expired
Outstanding at December 31, 2019
Vested at December 31, 2019
Exercisable at December 31, 2019
3,180,417 $
697,000
(7,500)
(409,167)
3,460,750 $
2,127,500 $
2,127,500 $
3,460,750 $
1,150,000
(112,500)
(80,000)
4,418,250 $
2,383,625 $
2,383,625 $
2.21
1.17
1.20
1.80
2.05
2.48
2.48
2.05
1.40
0.46
0.46
1.95
2.50
2.50
4.62 $
8.10
0.00
0.00
3.50 $
4.67 $
4.67 $
3.50 $
8.76
0.00
0.00
6.25 $
4.84 $
4.84 $
3,298,196
610,305
(4,241)
(434,962)
3,469,298
2,122,478
2,122,478
3,469,298
1,148,662
(41,789)
(28,800)
4,547,371
2,625,779
2,625,779
On October 9, 2019, the Board of Directors granted one employee options to purchase an aggregate of 75,000 shares of common stock at an exercise price of
$1.13 per share with a 5 year term (subject to continued employment), vesting at the rate of 1/4th of such options per year on the first 4 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 October 29, 2019, the Board of Directors granted the same employee above options to purchase an aggregate of 125,000 shares of common stock at an
exercise price of $1.00 per share with a 5 year term (subject to continued employment), vesting at the rate of 1/4th of such options per year on the first 4
anniversaries of the grant, under our 2019 Equity Incentive Plan, in consideration for services rendered and to be rendered to the Company.
On May 20, 2019, the Board of Directors granted 12 employees, 1 officer/director (Benjamin P. Cowart, the Company’s Chief Executive Officer), and 5 board
members options to purchase an aggregate of 487,000 , 163,000, and 300,000 , shares of common stock, respectively, at an exercise price of $1.45, $1.60, and
$1.45 per share, respectively, with a ten year, 5 year, and ten year term, respectively (subject to continued employment/directorship), vesting at the rate of 1/4th
of such options per year on the first 4 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 April 12, 2018, the Board of Directors granted 11 employees and 1 officer/director (Benjamin P. Cowart, the Company’s Chief Executive Officer) options to
purchase an aggregate of 521,000 and 166,000, shares of common stock, respectively, at an exercise price of $1.14 and $1.26 per share, respectively, with a
ten year and 5 year term, respectively (subject to continued employment/directorship), vesting at the rate of 1/4th of such options per year on the first 4
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 May 22, 2018, the Board of Directors granted 1 employee options to purchase an aggregate of 10,000 shares of common stock at an exercise price of $1.03
per share with a 10 year term (subject to continued employment/directorship), vesting at the rate of
F-31
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
1/4th of such options per year on the first 4 anniversaries of the grant, under our 2013 Stock Incentive Plan, as amended, in consideration for services rendered
and to be rendered to the Company.
A summary of the Company’s stock warrant activity and related information for the years ended December 31, 2019 and 2018 is as follows:
WARRANTS ISSUED AND OTHER THAN SERIES B
AND B1 PREFERRED STOCK:
Warrants
Weighted Average Exercise
Price
Weighted Average
Remaining Contractual Life
(in Years)
Grant Date
Fair Value
Outstanding at December 31, 2017
219,868 $
Warrants granted
Warrants exercised
Warrants canceled/forfeited/expired
Warrants at December 31, 2018
Vested at December 31, 2018
Exercisable at December 31, 2018
Outstanding at December 31, 2018
Warrants granted
Warrants exercised
Warrants canceled/forfeited/expired
Warrants at December 31, 2019
Vested at December 31, 2019
Exercisable at December 31, 2019
—
—
—
219,868 $
219,868 $
219,868 $
219,868 $
1,500,000
—
(219,868)
1,500,000 $
— $
— $
3.01
—
—
—
3.01
3.01
3.01
3.01
2.25
—
3.01
2.25
—
—
2.00 $
140,249
—
—
—
0.93 $
0.93 $
0.93 $
0.93 $
9.70
—
—
9.70 $
— $
— $
—
—
—
140,249
140,249
140,249
140,249
1,496,372
—
(140,249)
1,496,372
—
—
See "Note 14. Preferred Stock and Temporary Equity " for a description of the warrants that were granted in conjunction with our Series B and B1 Preferred stock.
See "Note 6. Myrtle Grove Share Purchase and Subscription Agreement " for a description of the warrants that were granted in conjunction with the MG SPV
closing.
NOTE 12. EARNINGS PER SHARE
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 years ended December 31, 2019 and December 31,
2018, respectively, 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. Due to their anti-dilutive effect, the
calculation of diluted earnings per share for the years ended December 31, 2019 and December 31, 2018 excludes: 1) options to purchase 4,418,250 and
3,460,750 shares, respectively, of common stock, 2) warrants to purchase 8,633,188 and 7,353,056 shares, respectively, of common stock, 3) Series B Preferred
Stock which is convertible into 3,826,055 and 3,604,827 shares, respectively, of common stock, 4) Series B1 Preferred Stock which is convertible into 9,028,085
and 10,057,597 shares, respectively, of common stock, and 5) Series A Preferred Stock which is convertible into 419,859 shares of common stock.
F-32
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, 2019 and 2018:
Basic loss per Share
Numerator:
Net loss available to common shareholders
Denominator:
Weighted-average common shares outstanding
Basic loss per share
Diluted Earnings per Share
Numerator:
Net loss available to common shareholders
Denominator:
Weighted-average shares outstanding
Effect of dilutive securities
Stock options and warrants
Preferred stock
Diluted weighted-average shares outstanding
Diluted loss per share
NOTE 13. COMMON STOCK
2019
2018
$
$
(11,445,628) $
(8,037,304)
40,988,946
35,411,264
(0.28) $
(0.23)
$
(11,445,628) $
(8,037,304)
40,988,946
35,411,264
—
—
—
—
40,988,946
35,411,264
$
(0.28) $
(0.23)
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, 2019 and
December 31, 2018, there were 43,395,563 and 40,174,821, respectively, shares of common stock issued and outstanding.
Each share of the Company's common stock is entitled to equal dividends and distributions per share with respect to the common stock when, as and if declared
by the Company's board of directors. No holder of any shares of the Company's common stock has a preemptive right to subscribe for any of the Company's
securities, nor are any shares of the Company's common stock subject to redemption or convertible into other securities. Upon liquidation, dissolution or winding-
up of the Company and after payment of creditors and preferred shareholders of the Company, if any, the assets of the Company will be divided pro rata on a
share-for-share basis among the holders of the Company's common stock. Each share of the Company's common stock is entitled to one vote. Shares of the
Company's common stock do not possess any cumulative voting rights.
During the year ended December 31, 2019, the Company issued 1,642,317 shares of common stock in connection with the conversion of Series B1 Preferred
Stock, pursuant to the terms of such securities. In addition, the Company issued 1,500,000 shares of common stock pursuant to the provisions of a subscription
agreement entered into with Tensile. Also, the Company issued 78,425 shares of common stock in connection with the exercise of options.
During the year ended December 31, 2018, the Company issued 7,199,774 shares of common stock in connection with the conversion of Series B1, Series B,
Series C, and Series A Convertible Preferred Stock, pursuant to the terms of such securities. In addition, the Company issued 150,000 shares of common stock
pursuant to the earnout provisions of the Nickco acquisition agreement. Also, the Company issued 241 shares of common stock in connection with the cashless
exercise of options. Finally, the Company issued 166,630 shares of common stock in lieu of cash dividends which accrued on the Series B1 Preferred Stock.
NOTE 14. 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
F-33
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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. As of December 31, 2019 and December 31, 2018, there were 419,859 shares of Series A Preferred Stock issued and outstanding. As of
December 31, 2019 and December 31, 2018, there were 3,826,055 and 3,604,827 Series B Preferred shares issued and outstanding, respectively. As of
December 31, 2019 and December 31, 2018, there were 9,028,085 and 10,057,597 shares of Series B1 Preferred Stock issued and outstanding, respectively.
There were no shares of Series C Preferred Stock issued or outstanding as of December 31, 2019 or 2018.
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.
F-34
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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. 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 and such redemption is legal under Nevada law.
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
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.
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 received no fee) from the June 2015 Offering, for an aggregate commission of $1.4 million which was netted against the proceeds.
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 June 2015 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
F-35
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 Warrants issued in connection with the Series B Preferred Stock (Series B Warrants) were initially 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. 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 preferred shares are
accounted for net outside of stockholders' equity with the Warrants accounted for as liabilities at their fair value. The initial value assigned to the derivative
warrant liability was recognized through a corresponding discount to the Series B Preferred Stock. The value of the derivative warrant liability will be re-measured
at each reporting period with changes in fair value recorded in earnings. The initial valuation of the warrants resulted in a beneficial conversion feature on the
convertible preferred stock of $5,737,796. The amounts related to the warrant discount and beneficial conversion feature will be accreted over the term as
deemed dividend. Fees in the amount of $1.4 million relating to the stock placement were netted against proceeds.
The following table represents the activity related to the Series B Preferred Stock, classified as Temporary Equity on the accompanying Consolidated Balance
Sheet, during the years ended December 31, 2019 and December 31, 2018:
Balance at beginning of period
Less: conversions of shares to common
Plus: discount accretion
Plus: dividends in kind
Balance at end of period
2019
2018
$
$
8,900,208 $
—
1,420,391
685,807
11,006,406 $
7,190,467
(62,962)
1,118,259
654,444
8,900,208
The Series B Warrants and Series B1 Warrants were revalued at December 31, 2019 and December 31, 2018 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 $1,969,216 and $ 1,481,692,
respectively. At December 31, 2019, the Series B Warrants and Series B1 Warrants were valued at approximately $150,558 and $1,818,658, respectively. The
dynamic Black-Scholes inputs used were: expected dividend rate of 0%, expected volatility of 65%-100%, risk free interest rate of 1.59% (Series B Warrants) and
1.58% (Series B1 Warrants), and expected term of 1 year (Series B Warrants) and 2 years (Series B1 Warrants).
As of December 31, 2019 and December 31, 2018, respectively, a total of $ 177,921 and $ 167,642 of dividends were accrued on our outstanding Series B
Preferred Stock.
The Certificate of Designation contains customary anti-dilution protection for proportional adjustments (e.g. stock splits). The beneficial conversion feature (BCF)
relates to potential differences 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 initial BCF of the Series B Preferred Stock was determined by calculating the intrinsic value of the conversion feature as follows:
F-36
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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
Series B1 Preferred Stock and Temporary Equity
$
$
$
$
$
$
25,000,000
7,028,067
17,971,933
8,064,534
2.23
2.94
0.7115
5,737,796
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 and such redemption is legal under Nevada law.
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).
F-37
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 $8.2 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 $0.61 million which was netted against the proceeds raised.
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.
F-38
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The Warrants issued in connection with the Series B1 Preferred Stock offering (Series B1 Warrants) were initially 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. 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 $12,743,047 with the May 2016 Warrants accounted for as liabilities at
their fair value. The initial value assigned to the derivative warrant liability was recognized through a corresponding discount to the Series B1 Preferred Stock.
The value of the derivative warrant liability will be re-measured at each reporting period with changes in fair value recorded in earnings. This initial valuation of
the warrants resulted in a beneficial conversion feature on the convertible preferred stock of approximately $2,371,106. The amounts related to the warrant
discount and beneficial conversion feature 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 following table represents the activity related to the Series B1 Preferred Stock, classified as Temporary Equity on the accompanying Consolidated Balance
Sheet, for the year ended December 31, 2019 and December 31, 2018:
Balance at beginning of period
Less: conversions of shares to common
Plus: discount accretion
Plus: dividends in kind
Balance at end of period
$
$
2019
2018
13,279,755 $
(2,241,890)
749,206
955,976
12,743,047 $
15,769,478
(5,068,602)
841,754
1,737,125
13,279,755
For the years ending December 31, 2019 and December 31, 2018, respectively, a total of $ 211,256 and $ 235,360 of dividends were accrued on our outstanding
Series B1 Preferred Stock.
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.
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
F-39
May 13, 2016
19,349,745
2,867,264
16,482,481
12,403,683
1.33
1.52
0.19
2,371,106
$
$
$
$
$
$
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The following is an analysis of changes in the derivative liability:
Level Three Roll-Forward
Balance at beginning of period
Change in fair value of warrants
Balance at end of period
Year Ended December 31,
2019
2018
$
$
1,481,692 $
487,524
1,969,216 $
2,245,408
(763,716)
1,481,692
NOTE 15. COMMODITY DERIVATIVE INSTRUMENTS
The Company utilizes derivative instruments to manage its exposure to fluctuations in the underlying commodity prices of its inventory. The Company's
management sets and implements hedging policies, including volumes, types of instruments and counterparties, to support oil prices at targeted levels and
manage its exposure to fluctuating prices.
The Company’s derivative instruments consist of swap and futures arrangements for oil. In a commodity swap agreement, if the agreed-upon published third-party
index price (“index price”) is lower than the swap fixed price, the Company receives the difference between the index price and the swap fixed price. If the index
price is higher than the swap fixed price, the Company pays the difference. For futures arrangements, the Company receives the difference positive or negative
between an agreed-upon strike price and the market price.
The mark-to-market effects of these contracts as of December 31, 2019 and December 31, 2018 , are summarized in the following table. The notional amount is
equal to the total net volumetric derivative position during the period indicated. The fair value of the crude oil swap agreements is based on the difference
between the strike price and the New York Mercantile Exchange futures price for the applicable trading months.
Contract
Type
Contract Period
Weighted Average
Trade Price (Barrels)
Remaining Volume
(Barrels)
Fair Value
December 31, 2019
Swap
Swap
Dec. 2019- Mar. 2020
Dec. 2019- Mar. 2020
Futures
Dec. 2019- Mar. 2020
$
$
$
40.88
81.19
84.83
130,000 $
130,000 $
105,000 $
539,800
(673,428)
(242,222)
F-40
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Contract
Type
Contract Period
Weighted Average
Trade Price (Barrels)
Remaining Volume
(Barrels)
Fair Value
December 31, 2018
Swap
Swap
Futures
Futures
Dec. 2018- Feb. 2019
Dec. 2018- Feb. 2019
Feb. 2019- Mar. 2019
Dec. 2018- Feb. 2019
$
$
$
$
48.78
68.69
70.42
45.41
60,000 $
60,000 $
69,000 $
30,000 $
(1,048,400)
1,097,124
394,317
252,900
The carrying values of the Company's derivatives positions and their locations on the consolidated balance sheets as of December 31, 2019 and 2018 are
presented in the table below.
Balance Sheet Classification
Contract Type
2019
2018
Crude oil swaps
Crude oil futures
$
$
(133,628) $
(242,222)
48,724
647,217
(375,850) $
695,941
Derivative commodity asset
(liability)
For the years ended December 31, 2019 and 2018, we recognized a $ 2,458,359 loss and $1,062,682 gain, respectively, on commodity derivative contracts on
the consolidated statements of operations as part of our costs of revenues.
NOTE 16. 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 net loss and income of
$765,931 and $602,259, respectively for the years ended December 31, 2019 and December 31, 2018, respectively, and then deducted and added the 49% or
$375,306 and $234,188, respectively, of income (loss) attributable to the non-controlling interest back to the Company's " Net income (loss) attributable to Vertex
Energy, Inc." in the Consolidated Statement of Operations.
F-41
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
NOTE 17. SEGMENT REPORTING
The Company’s reportable segments include the Black Oil, Refining and Marketing and Recovery segments. Segment information for the years ended
December 31, 2019 and 2018 are as follows:
Revenues
Income (loss) from operations
Total assets
Revenues
Income (loss) from operations
Total assets
NOTE 18. LEASES
YEAR ENDED DECEMBER 31, 2019
Black Oil
Refining and
Marketing
Recovery
Total
$
$
$
139,269,164 $
12,957,767 $
11,138,634 $
163,365,565
433,901 $
(576,487) $
(2,631,458) $
(2,774,044)
114,976,772 $
1,101,470 $
4,681,677 $
120,759,919
YEAR ENDED DECEMBER 31, 2018
Black Oil
Refining and
Marketing
Recovery
Total
$
$
$
143,836,981 $
22,935,482 $
13,948,198 $
180,720,661
3,561,223 $
(2,250,924) $
(821,951) $
488,348
76,540,888 $
1,407,002 $
6,212,518 $
84,160,408
The Company has various lease agreements including leases of plant, facilities, railcar, and equipment. Some leases include options to purchase, terminate or
extend for one or more years. These options are included in the lease term when it is reasonably certain that the option will be exercised.
Leases with an initial term of 12 months or less are not recorded on our consolidated balance sheet; we recognize lease expense for these leases on a straight-
line basis over the lease term. Leases with initial terms in excess of 12 months are recorded as operating or financing leases in our consolidated balance
sheet.
Lease assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at
commencement date. As most of our leases do not provide an implicit rate, we use secured incremental borrowing rates based on the information available at
commencement date, including lease term, in determining the present value of future payments. The operating lease asset also includes any lease payments
made and excludes lease incentives and initial direct costs incurred. Our lease terms may include options to extend or terminate the lease when it is reasonably
certain that the option will be exercised.
At inception, the Company determines if an arrangement contains a lease and whether that lease meets the classification criteria of a finance or operating lease.
Some of the Company’s lease arrangements contain lease components (e.g., minimum rent payments) and non-lease components (e.g. maintenance, labor
charges, etc.). The Company generally does not separate lease and nonlease components for all classes of underlying assets. For certain equipment leases,
such as freight car, vehicles and work equipment, the Company accounts for the lease and non-lease components as a single lease component.
Certain of the Company’s lease agreements include rental payments that are adjusted periodically for an index or rate. The leases are initially measured using
the projected payments adjusted for the index or rate in effect at the commencement date. The Company’s lease agreements do not contain any material
residual value guarantees or material restrictive covenants.
Finance Leases
Finance leases are included in finance lease right-of-use lease assets and finance lease liability current and long-term liabilities on the unaudited consolidated
balance sheets. The associated amortization expense of $166,946 and interest expense of $41,889 are included in depreciation and amortization and interest
expense, respectively, on the unaudited consolidated statements of operations for the year ended December 31, 2019. Please see “Note 9. Line of Credit and
Long-Term Debt” for more details.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Operating Leases
Operating leases are included in operating lease right-of-use lease assets, and operating current and long-term lease liabilities on the consolidated balance
sheets. Lease expense for operating leases is recognized on a straight-line basis over the lease term. Variable lease expense is recognized in the period in
which the obligation for those payments is incurred. Lease expense for equipment is included in cost of revenues and other rents are included in selling, general
and administrative expense on the consolidated statements of operations and are reported net of lease income. Lease income is not material to the results of
operations for the year ended December 31, 2019. Total operating lease costs for the year ended December 31, 2019 was $6.3 million.
Cash Flows
An initial right-of-use asset of $37.8 million was recognized as a non-cash asset addition with the adoption of the new lease accounting standard. Cash paid for
amounts included in operating lease liabilities was $2.3 million during the year ended December 31, 2019 and is included in operating cash flows. Cash paid for
amounts included in finance lease was $165,598 during the year ended December 31, 2019 and is included in financing cash flows.
Maturities of our lease liabilities for all operating leases are as follows as of December 31, 2019:
Year 1
Year 2
Year 3
Year 4
Year 5
Thereafter
Total lease payments
Less: interest
Present value of lease liabilities
Facilities
Equipment
Plant
Railcar
Total
$
719,607 $
161,539 $
4,060,417 $
943,741 $
549,293
392,654
306,000
300,000
2,375,000
161,539
26,953
—
—
—
4,060,417
4,060,417
4,060,417
4,060,417
35,524,907
582,386
24,696
1,278
—
—
5,885,304
5,353,635
4,504,720
4,367,695
4,360,417
37,899,907
$
$
4,642,554 $
350,031 $
55,826,992 $
1,552,101 $
62,371,678
(1,685,627)
(22,605)
(24,980,750)
(95,811)
(26,784,793)
2,956,927 $
327,426 $
30,846,242 $
1,456,290 $
35,586,885
The weighted average remaining lease terms and discount rates for all of our operating leases were as follows as of December 31, 2019:
Remaining lease term and discount rate:
Weighted average remaining lease terms (years)
December 31, 2019
Lease facilities
Lease equipment
Lease plant
Lease railcar
Weighted average discount rate
Lease facilities
Lease equipment
Lease plant
Lease railcar
Significant Judgments
5.34
2.17
13.26
1.33
9.17%
8.00%
9.37%
8.00%
Significant judgments include the discount rates applied, the expected lease terms, lease renewal options and residual value guarantees. There are several
leases with renewal options or purchase options. Using the practical expedient, the Company utilized existing lease classifications as of December 31, 2018.
The purchase options are not expected to have a material impact on the lease obligation. There are several facility and plant leases which have lease renewal
options from one to twenty years.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The largest facility lease has an initial term through 2032. That lease does not have an extension option. For the two plant leases both have multiple 5-year
extension options for a total of 20 years. Two extension options have been included in the lease right to use asset and lease obligation at December 31, 2019.
The Company will reassess the lease terms and purchase options when there is a significant change in circumstances or when the Company elects to exercise
an option that had previously been determined that it was not reasonably certain to do so.
NOTE 19. SUBSEQUENT EVENTS
Issuance of Series B and B1 Preferred Stock Shares in-Kind
We paid the accrued dividends on our Series B Preferred Stock and Series B1 Preferred Stock, which accrued as of December 31, 2019, in-kind by way of the
issuance of 57,394 restricted shares of Series B Preferred Stock pro rata to each of the then holders of our Series B Preferred Stock in January 2020 and the
issuance of 135,429 restricted shares of Series B1 Preferred Stock pro rata to each of the then holders of our Series B1 Preferred Stock in January 2020. If
converted in full, the 57,394 shares of Series B Preferred Stock would convert into 57,394 shares of common stock and the 135,429 shares of Series B1
Preferred Stock would convert into 135,429 shares of common stock.
Conversions of Series B1 Preferred Stock
On January 3, 2020 a holder of our Series B1 Preferred Stock converted 1,107,893 shares of Series B1 Preferred Stock into 1,107,893 shares of common stock,
pursuant to the terms of such Series B1 Preferred Stock.
On January 9, 2020 and January 13, 2020, two holders converted an aggregate of 601,090 and 9,018 shares of Series B1 Preferred Stock into 601,090 and
9,018 shares of common stock, respectively, pursuant to the terms of such Series B1 Preferred Stock.
On January 10, 2020, a holder of our Series B1 Preferred Stock converted 104,940 shares of Series B1 Preferred Stock into 104,940 shares of common stock,
pursuant to the terms of such Series B1 Preferred Stock.
On January 13, 2020, a holder of our Series B1 Preferred Stock converted 9,018 shares of Series B1 Preferred Stock into 9,018 shares of common stock,
pursuant to the terms of such Series B1 Preferred Stock.
On January 22, 2020, two holders of our Series B1 Preferred Stock converted 25,000 shares each of Series B Preferred Stock into 25,000 shares of common
stock each, pursuant to the terms of such Series B Preferred Stock.
On January 27, 2020, a holder of our Series B1 Preferred Stock converted 252,337 shares of Series B1 Preferred Stock into 252,337 shares of common stock,
pursuant to the terms of such Series B1 Preferred Stock.
On January 28, 2020, two holders of our Series B1 Preferred Stock converted 17,000 shares each of Series B Preferred Stock into 17,000 shares of common
stock each, pursuant to the terms of such Series B1 Preferred Stock.
Heartland Share Purchase and Subscription Agreement
On January 17, 2020 (the “Heartland Closing Date”), Vertex Operating, Tensile-Heartland, and solely for the purposes of the Heartland Guaranty (defined below),
the Company, and HPRM LLC, a Delaware limited liability company, which entity was formed as a special purpose vehicle in connection with the transactions,
described in greater detail below (“Heartland SPV”), entered into a Share Purchase and Subscription Agreement (the “Heartland Share Purchase”).
Prior to entering into the Heartland Share Purchase, the Company transferred 100% of the ownership of Vertex Refining OH, LLC, its indirect wholly-owned
subsidiary (“Vertex OH”) to Heartland SPV in consideration for 13,500 Class A Units, 13,500 Class A-1 Preferred Units and 11,300 Class B Units of Heartland
SPV and immediately thereafter contributed 248 Class B Units to the Company’s wholly-owned subsidiary, Vertex Splitter Corporation, a Delaware corporation
(“Vertex Splitter”), as a contribution to capital.
Vertex OH owned the Company’s Columbus, Ohio, Heartland facility, which produces a base oil product that is sold to lubricant packagers and distributors.
F-44
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Pursuant to the Heartland Share Purchase, Vertex Operating sold Tensile-Heartland the 13,500 Class A Units and 13,500 Class A-1 Preferred Units of
Heartland SPV in consideration for $13.5 million. Also, on the Heartland Closing Date, Tensile-Heartland purchased 7,500 Class A Units and 7,500 Class A-1
Units in consideration for $7.5 million (less the expenses of Tensile-Heartland in connection with the transaction) directly from Heartland SPV.
The approximate $7.5 million purchase amount and future free cash flows from the operation of Heartland SPV are planned to be available for investments at the
Heartland facility to increase self-collections, maximize the throughput of the refinery, enhance the quality of the output and complete other projects.
Concurrently with the closing of the transactions described above, and pursuant to the terms of the Heartland Share Purchase, the Company, through Vertex
Operating, purchased 1,000 newly issued Class A Units from MG SPV at a cost of $1,000 per unit ($1 million in aggregate).
The Heartland Share Purchase provides Tensile-Heartland an option, exercisable at its election, any time, subject to the terms of the Heartland Share Purchase,
to purchase up to an additional 7,000 Class A-2 Preferred Units at a cost of $1,000 per Class A-2 Preferred Unit from Heartland SPV.
The Heartland SPV is currently owned 35% by Vertex Operating and 65% by Tensile-Heartland. Heartland SPV is managed by a five-member Board of
Managers, of which three members are appointed by Tensile-Heartland and two are appointed by the Company. The Class A Units held by Tensile-Heartland are
convertible into Class B Units as provided in the Limited Liability Company Agreement of Heartland SPV (the “Heartland Company Agreement”), based on a
conversion price (initially one-for-one) which may be reduced from time to time if new Units of Heartland SPV are issued and will automatically convert into
Series A Units upon certain events described in the Heartland Company Agreement.
The Class A-1 and A-2 Preferred Units (“Class A Preferred Units”), which are 100% owned by Tensile-Heartland, accrue a 22.5% per annum preferred return
subject to terms of the Heartland Company Agreement (the “Class A Yield”).
Additionally, the Class A Unit holders (common and preferred) may force Heartland SPV to redeem the outstanding Class A Units at any time on or after the
earlier of (a) the fifth anniversary of the Closing Date and (ii) the occurrence of a Heartland Triggering Event (defined below)(a “Heartland Redemption”). The
cash purchase price for such redeemed Class A Unit will be the greater of (y) the fair market value of such units (without discount for illiquidity, minority status or
otherwise) as determined by a qualified third party agreed to in writing by a majority of the holders seeking Heartland Redemption and Vertex Operating
(provided that Vertex Operating still owns Class B Units on such date) and (z) the original per-unit price for such Class A Units plus fifty percent (50%) of the
aggregate capital invested by the Class A Unit holders through such Heartland Redemption date. “Heartland Triggering Events” include (a) any termination of the
Administrative Services Agreement pursuant to its terms and/or any material breach by us of the environmental remediation and indemnity agreement, (b) any
dissolution, winding up or liquidation of the Company, Vertex Operating or any significant subsidiary of Vertex Operating, (c) any sale, lease, license or
disposition of any material assets of the Company, Vertex Operating or any significant subsidiary of Vertex Operating, or (d) any transaction or series of related
transactions (whether by merger, exchange, contribution, recapitalization, consolidation, reorganization, combination or otherwise) involving the Company,
Vertex Operating or any significant subsidiary of Vertex Operating, the result of which is that the holders of the voting securities of the relevant entity as of the
Closing Date are no longer the beneficial owners, in the aggregate, after giving effect to such transaction or series of transactions, directly or indirectly, of more
than fifty percent (50%) of the voting power of the outstanding voting securities of the entity, subject to certain other requirements set forth in the Heartland
Company Agreement.
In the event that Heartland SPV fails to redeem such Class A Units within 180 days after a redemption is triggered, the Class A Yield is increased to 25% until
such time as such redemption is completed (with such increase being effective back to the original date of a notice of redemption). In addition, in such event, the
Class A Unit holders may cause Heartland SPV to initiate a process intended to result in a sale of Heartland SPV.
Distributions of available cash of Heartland SPV pursuant to the Heartland Company Agreement (including pursuant to liquidations of Heartland SPV), subject to
certain exceptions set forth therein, are to be made (a) first, to the holders of the Class A Preferred Units, in amount equal to the greater of (A) the aggregate
unpaid Class A Yield and (B) an amount equal to fifty percent (50%) of the aggregate capital invested by the Class A Preferred Unit holders (initially Tensile-
Heartland)(such aggregate capital invested by the Class A Preferred Unit holders, the “Heartland Invested Capital”, which totaled approximately $ 21 million as of
the Heartland Closing Date, subject to adjustment as provided in the Heartland Share Purchase), less prior distributions (such greater amount of (A) and (B), the
“Class A Preferred Priority Distributions ”); (b) second, the Class A Preferred Unitholders, together as a separate
F-45
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
and distinct class, are entitled to receive an amount equal to the aggregate Heartland Invested Capital; (c) third, the Class B Unitholders (other than Class B
Unitholders which received Class B Units upon conversion of Class A Preferred Units), together as a separate and distinct class, are entitled to receive all or a
portion of any distribution equal to the sum of all distributions made under sections (a) and (b) above; and (d) fourth, to the holders of Units who are eligible to
receive such distributions in proportion to the number of Units held by such holders.
Variable interest entity
Per ASC 810-10-25-38A and 38B, a reporting entity shall be deemed to have a controlling financial interest in a variable interest entity (VIE) if it has both of the
following characteristics: the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance, and the obligation to absorb
losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. The
Company determined that since substantially all of the activities of Heartland SPV (i.e., the VIE) are conducted on behalf of a single VIE holder, and that the
Company is the primary beneficiary of the VIE. Accordingly, Heartland SPV should be consolidated in the Company’s consolidated financial statements.
Accordantly, the only impact to the consolidated financial position and results of operations will be to present the 65% owned by Tensile-Heartland in non-
controlling interest.
F-46
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 Exchange Act, is recorded, processed, summarized
and reported within the time periods specified in the rules and forms of the Commission and that such information is accumulated and communicated to our
management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), as appropriate, to allow timely decisions regarding required
disclosures.
Management, with the participation of our CEO and CFO, evaluated the effectiveness of the design and operation of our disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of December 31, 2019, the end of the fiscal period covered by this report. As of December
31, 2019, 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 Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Commission and
that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding
required disclosures.
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 Exchange Act. 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, 2019, 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, 2019, we determined that a control deficiency existed that constituted a material
weakness, as described below:
We did not design or maintain an effective control environment with formal accounting policies and controls to adequately identify and record complex
and non-routine transactions, including our evaluation and review of work performed by specialists hired by us to assist in the assessments and
conclusions surrounding such transactions.
While the deficiency described above did not result in a material adjustment to our consolidated financial statements, the material weakness created a
reasonable possibility that there could be a material misstatement of our annual or interim financial statements and related disclosures that would not be
prevented or detected on a timely basis.
As of the date of this filing, we are planning to address the material weakness described above by (a) seeking outside assistance from qualified experts
when or if we enter into or effect transactions which raise complex financial accounting issues and related disclosures, and (b) implementing additional
documentation and disclosure controls and procedures to facilitate high level management review in order to detect material errors in our financials. Accordingly,
management has concluded that the
88
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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
None.
89
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 “Delinquent Section 16(a) Reports” (to the extent applicable and warranted) in the Company’s 2020 Proxy Statement to
be filed with the U.S. Securities and Exchange Commission (“SEC”) within 120 days after December 31, 2019 in connection with the solicitation of proxies for the
Company’s 2020 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 2020 Proxy Statement to be filed with the SEC within 120 days after December 31, 2019 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” and "Equity Compensation Plan
Information" in the Company’s 2020 Proxy Statement to be filed with the SEC within 120 days after December 31, 2019 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 2020 Proxy Statement to be filed with the SEC within 120 days after December 31, 2019 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 2020
Proxy Statement to be filed with the SEC within 120 days after December 31, 2020 and is incorporated herein by reference.
90
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Item 15. Exhibits, Financial Statement Schedules
•
•
Documents filed as part of this report
All financial statements
PART IV
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2019 and 2018
Consolidated Statements of Operations for the years ended December 31, 2019 and 2018
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2019 and 2018
Consolidated Statements of Cash Flows for the years ended December 31, 2019 and 2018
Notes to Consolidated Financial Statements
(1) Financial Statement Schedules
Page
F-2
F-3
F-6
F-7
F-8
F-10
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.
•
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.
EXHIBIT INDEX
Incorporated by Reference
Filed or
Furnished
Herewith
Form
File No.
8-K
2.1
7/31/2019
001-11476
8-K
8-K/A
2.2
3.1
1/24/2020
6/26/2009
000-53619
000-53619
8-K
3.1
7/16/2010
000-53619
8-K
3.1
5/13/2016
001-11476
8-K
3.2
5/13/2016
001-11476
8-K
8-K
3.3
3.1
5/13/2016
4/29/2019
001-11476
001-11476
8-K
8-K/A
10-K
8-K
10-K
S-8
8-K
S-8
10.1
4.1
10.27
4.1
10.29
4.1
11/12/2013
6/26/2009
12/31/2012
7/31/2009
12/31/2012
001-11476
000-53619
001-11476
000-53619
001-11476
7/28/2014
333-197659
10.1
9/30/2013
001-11476
4.3
7/28/2014
333-197659
Item 15. Exhibits, Financial Statement Schedules
None.
Exhibit
Number
2.1(+)
2.2(+)
3.1
3.2
3.3
3.4
3.5
3.6
4.1
Share Purchase and Subscription Agreement by and among Vertex
Refining Myrtle Grove LLC, Tensile-Myrtle Grove Acquisition Corporation,
Vertex Energy Operating LLC, and solely for the purposes of Section 9.1,
Vertex Energy, Inc., dated July 25, 2019
Share Purchase and Subscription Agreement dated January 17, 2020, by
and among HPRM LLC, Vertex Energy Operating LLC, Tensile-Heartland
Acquisition Corporation, and solely for the purposes of Section 9.1, Vertex
Energy, Inc.
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.
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.
Description of Securities of the Registrant*
X
10.1(#)
Tolling Agreement between KMTEX, Ltd. and Vertex Energy Inc., dated
April 17, 2013
10.2
10.3
10.4
10.5
10.6
10.7
10.8
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***
92
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Exhibit
Number
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
Employment Agreement between Vertex Refining LA, LLC and James P.
Gregory (Effective May 2, 2014)***
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
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 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 10.14)
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 ***
10.19(##)
First Amendment to Processing Agreement between KMTEX LLC and
Vertex Energy, Inc., effective November 1, 2013
10.20
Executive Employment Agreement with John Strickland (COO), effective
October 1, 2015
Second Amendment to Processing Agreement between KMTEX LLC and
Vertex Energy, Inc., dated December 3, 2015 and effective January 1,
2016
10.21(##)
10.22(##)
Swap Agreement dated January 29, 2016, by Vertex Energy Operating,
LLC and Safety-Kleen Systems, Inc.
10.23(##)
Base Oil Sales Agreement dated January 29, 2016, by Vertex Energy
Operating, LLC and Safety-Kleen Systems, Inc.
10.24
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
10.25
93
Filed or
Furnished
Herewith
Incorporated by Reference
Form
File No.
8-K
10.1
7/29/2014
001-11476
10-Q
10.22
6/30/2014
001-11476
10-Q
10.23
6/30/2014
001-11476
8-K
4.1
12/9/2014
001-11476
8-K
8-K
8-K
10-Q
10-Q
8-K
4.2
12/9/2014
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
8-K
8-K
8-K
8-K
10.1
1/15/2016
001-11476
10.1
2/3/2016
001-11476
10.2
10.2
2/3/2016
5/13/2016
001-11476
001-11476
8-K
10.1
2/7/2017
001-11476
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Exhibit
Number
10.26
10.27
10.28
(###)
10.29
10.30
10.31
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*
Form of First Amendment and Consent to Credit Agreement dated
October 9, 2017, by and among Vertex Energy, Inc., Vertex Energy
Operating, LLC, Encina Business Credit, LLC as Agent and the Lenders
party thereto
Second Amendment to Credit Agreement dated December 15, 2017, by
and among Vertex Energy, Inc., Vertex Energy Operating, LLC, Encina
Business Credit, LLC as Agent and the Lenders party thereto
First Amendment to ABL Credit Agreement dated December 15, 2017, by
and among Vertex Energy, Inc., Vertex Energy Operating, LLC, Encina
Business Credit, LLC as Agent and the Lenders party thereto
10.32%
Limited Liability Company Agreement of Vertex Refining Myrtle Grove LLC
dated July 25, 2019
Right of First Offer Letter Agreement dated July 25, 2019, by and between
Tensile-Myrtle Grove Acquisition Corporation, Vertex Energy Operating
LLC and Vertex Energy, Inc.
10.33
10.34%
Subscription Agreement dated July 25, 2019, by Tensile Partners Master
Fund LP in favor of Vertex Energy, Inc.
Common Stock Purchase Warrant initially held by Tensile Partners Master
Fund LP to purchase up to 1,500,000 shares of common stock, dated July
25, 2019
Registration Rights and Lock-Up Agreement dated July 25, 2019, by and
between Vertex Energy, Inc. and Tensile Partners Master Fund LP
Third Amendment to Credit Agreement dated December 15, 2017, by and
among Vertex Energy, Inc., Vertex
10.35
10.36
10.37%
94
Incorporated by Reference
Filed or
Furnished
Herewith
Form
File No.
8-K
10.2
2/7/2017
001-11476
8-K
10.3
2/7/2017
001-11476
10-K
10.66
12/31/2016
001-11476
8-K
10.3
12/19/2017
001-11476
8-K
10.4
12/19/2017
001-11476
8-K
10.5
12/19/2017
001-11476
8-K
10.1
7/31/2019
001-11476
8-K
8-K
8-K
8-K
10.2
7/31/2019
001-11476
10.3
7/31/2019
001-11476
10.4
7/31/2019
001-11476
10.5
7/31/2019
001-11476
8-K
10.8
7/31/2019
001-11476
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Incorporated by Reference
Filed or
Furnished
Herewith
Form
File No.
8-K
8-K
10.9
2.1
7/31/2019
10/29/2019
001-11476
001-11476
8-K
10.1
1/13/2020
001-11476
8-K
8-K/A
10.2
14.1
1/24/2020
2/13/2013
001-11476
001-11476
Glossary of Selected Terms
10-K
99.1
12/31/2012
001-11476
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
Unaudited Pro Forma Condensed Consolidated Financial Information of
Vertex Energy, Inc. showing the effects of the Heartland SPV transaction
8-K/A
10-Q
10-Q
8-K
99.2
99.2
99.2
99.2
2/13/2013 001-11476
9/30/2013
001-11476
9/30/2014 001-11476
1/24/2020 001-11476
Exhibit
Number
Third Amendment to ABL Credit Agreement dated December 15, 2017, by
and among Vertex Energy, Inc., Vertex Energy Operating, LLC, Encina
Business Credit, LLC as Agent and the Lenders party thereto, dated July
25, 2019
10.38%
10.39
Vertex Energy, Inc. 2019 Equity Incentive Plan
10.40%£
Joint Supply and Marketing Agreement dated January 10, 2020, by and
between Bunker One (USA) Inc. and Vertex Energy Operating, LLC
Limited Liability Company Agreement of HPRM LLC dated January 17,
2020
Code of Ethical Business Conduct and Whistleblower Protection Policy
Subsidiaries*
Consent of Ham, Langston & Brezina, L.L.P.*
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
14.1
21.1
23.1
31.1
31.2
32.1
32.2
99.1
99.2
99.3
99.4
99.5
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
X
X
X
X
X
X
95
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
* 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.
### 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.
£ Certain confidential portions of this Exhibit were omitted by means of marking such portions with brackets (“
(i) are not material and (ii) would be competitively harmful if publicly disclosed.
[****]”) because the identified confidential portions
% Certain schedules, annexes and similar attachments have been omitted pursuant to Item 601(a)(5) of Regulation S-K. A copy of any omitted schedule or
exhibit will be furnished supplementally to the Securities and Exchange Commission upon request; provided, however that Vertex Energy, Inc. may request
confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, for any schedule or exhibit so furnished.
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 3, 2020
Date: March 3, 2020
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.
96
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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 3, 2020
Date:
March 3, 2020
By:
/s/ Christopher Stratton
By:
/s/ Dan Borgen
Christopher Stratton
Director
Dan Borgen
Director
Date:
March 3, 2020
Date:
March 3, 2020
By:
/s/ Timothy C. Harvey
Timothy C. Harvey
Director
By:
/s/ David Phillips
David Phillips
Director
Date:
March 3, 2020
Date:
March 3, 2020
By:
/s/ James P. Gregory
James P. Gregory
Director
Date:
March 3, 2020
97
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
DESCRIPTION OF SECURITIES
REGISTERED PURSUANT TO SECTION 12 OF
THE SECURITIES EXCHANGE ACT OF 1934
Exhibit 4.1
The following summary describes the common stock of Vertex Energy, Inc., a Nevada corporation (“ Vertex” or the “Company”), which common stock is
registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Only the Company’s common stock is registered
under Section 12 of the Exchange Act.
DESCRIPTION OF COMMON STOCK
The following description of our common stock is a summary and is qualified in its entirety by reference to our Articles of Incorporation, as amended and
our Bylaws, as amended, which are incorporated by reference as exhibits to this Annual Report on Form 10-K, and by applicable law. For purposes of this
description, references to “Vertex,” “we,” “our” and “us” refer only to Vertex and not to its subsidiaries.
Authorized Capitalization
The total number of authorized shares of our common stock is 750,000,000 shares, $0.001 par value per share. 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”).
The terms of our preferred stock are not included herein as such preferred stock is not registered under Section 12 of the Exchange Act.
Common Stock
Voting Rights. Each share of our common stock is entitled to one vote on all stockholder matters. Shares of our common stock do not possess any
cumulative voting rights.
Except for the election of directors, if a quorum is present, an action on a matter is approved if it receives the affirmative vote of the holders of a majority
of the voting power of the shares of capital stock present in person or represented by proxy at the meeting and entitled to vote on the matter, unless otherwise
required by applicable law, Nevada law, our Articles of Incorporation, as amended or Bylaws, as amended. The election of directors will be determined by a
plurality of the votes cast in respect of the shares present in person or represented by proxy at the meeting and entitled to vote, meaning that the nominees with
the greatest number of votes cast, even if less than a majority, will be elected. The rights, preferences and privileges of holders of common stock are subject to,
and may be impacted by, the rights of the holders of shares of any series of preferred stock that we have designated, or may designate and issue in the future.
Dividend Rights. 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, subject to any preferential or other rights of any outstanding preferred stock.
Liquidation and Dissolution Rights. Upon liquidation, dissolution or winding up, our common stock will be entitled to receive pro rata on a share-for-
share basis, the assets available for distribution to the stockholders after payment of liabilities and payment of preferential and other amounts, if any, payable on
any outstanding preferred stock.
Fully Paid Status. All outstanding shares of the Company’s common stock are validly issued, fully paid and non-assessable.
Listing. Our common stock is listed and traded on the Nasdaq Capital Market under the symbol “ VTNR”.
Other Matters . 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.
Anti-Takeover Provisions Under The Nevada Revised Statutes
Business Combinations
Sections 78.411 to 78.444 of the Nevada revised statues (the “ NRS”) prohibit a Nevada corporation from engaging in a “ combination” with an “interested
stockholder” for three years following the date that such person becomes an interested stockholder and place certain restrictions on such combinations even
after the expiration of the three-year period. With certain exceptions, an interested stockholder is a person or group that owns 10% or more of the corporation’s
outstanding voting power (including stock with respect to which the person has voting rights and any rights to acquire stock pursuant to an option, warrant,
agreement, arrangement, or understanding or upon the exercise of conversion or exchange rights) or is an affiliate or associate of the corporation and was the
owner of 10% or more of such voting stock at any time within the previous three years.
A Nevada corporation may elect not to be governed by Sections 78.411 to 78.444 by a provision in its articles of incorporation. We have such a provision
in our Articles of Incorporation, as amended, pursuant to which we have elected to opt out of Sections 78.411 to 78.444; therefore, these sections do not apply to
us.
Control Shares
Nevada law also seeks to impede “unfriendly” corporate takeovers by providing in Sections 78.378 to 78.3793 of the NRS that an “ acquiring person ” shall
only obtain voting rights in the “control shares” purchased by such person to the extent approved by the other stockholders at a meeting. With certain exceptions,
an acquiring person is one who acquires or offers to acquire a “controlling interest” in the corporation, defined as one-fifth or more of the voting power. Control
shares include not only shares acquired or offered to be acquired in connection with the acquisition of a controlling interest, but also all shares acquired by the
acquiring person within the preceding 90 days. The statute covers not only the acquiring person but also any persons acting in association with the acquiring
person.
A Nevada corporation may elect to opt out of the provisions of Sections 78.378 to 78.3793 of the NRS. We have no provision in our Articles of
Incorporation pursuant to which we have elected to opt out of Sections 78.378 to 78.3793; therefore, these sections do apply to us.
Removal of Directors
Section 78.335 of the NRS provides that 2/3rds of the voting power of the issued and outstanding shares of the Company are required to remove a
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Director from office. As such, it may be more difficult for stockholders to remove Directors due to the fact the NRS requires greater than majority approval of the
stockholders for such removal.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
EXHIBIT 21.1
Subsidiaries
•
•
•
•
•
•
•
•
Vertex Energy Operating, LLC, a Texas Limited Liability Company (wholly-owned)(“ Vertex Operating”)
Vertex Refining, LA,, LLC, a Louisiana Limited Liability Company (wholly-owned by Vertex Operating)
Vertex Recovery Management, LLC, a Texas Limited Liability Company (wholly-owned)(“Vertex Recovery”)
Vertex Recovery Management LA, LLC, a Louisiana Limited Liability Company (51% owned by Vertex Recovery Management, LLC and 49% owned by
Industrial Pipe, Inc.)
Vertex Splitter Corporation, a Delaware corporation (wholly-owned)
Vertex Refining Myrtle Grove LLC, a Delaware Limited Liability Company (84.42% owned by Vertex Operating)
HPRM LLC, a Delaware Limited Liability Company (35% owned by Vertex Operating)
Vertex Acquisition Sub, LLC, a Nevada Limited Liability Company (“ Vertex Acquisition”) (wholly-owned by Vertex Operating)
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 hereby 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 3, 2020, relating to the consolidated financial
statements which appear in this Annual Report on Form 10-K.
/s/ Ham, Langston & Brezina L.L.P.
Houston, Texas
March 3, 2020
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 an 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 3, 2020
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 an 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 3, 2020
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, 2019, 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 3, 2020
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, 2019, 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 3, 2020
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.