Vertex Energy Inc. [VTNR] Filings

10-Q 1 vtnr-20230331.htm 10-Q vtnr-20230331

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2023

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM _____________ TO _____________

Commission File Number 001-11476

———————

VERTEX ENERGY, INC.

(Exact name of registrant as specified in its charter)

———————


Nevada			94-3439569
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)

1331 Gemini Street, Suite 250, Houston, Texas 77058

(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: 866-660-8156

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.001 Par Value Per Share	VTNR	The NASDAQ Stock Market LLC
		(Nasdaq Capital Market)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☑ Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☑ Yes ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☑	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.

¨ Yes ☑ No

As of May 8, 2023, there were 75,934,197 shares of common stock issued and outstanding.

TABLE OF CONTENTS


		Page
Glossary of Terms		4
	PART I
Item 1.	Financial Statements

	Consolidated Balance Sheets (unaudited)	8

	Consolidated Statements of Operations (unaudited)	10

	Consolidated Statements of Stockholders' Equity (unaudited)	11

	Consolidated Statements of Cash Flows (unaudited)	12

	Notes to Consolidated Financial Statements (unaudited)	14

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	37

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	57

Item 4.	Controls and Procedures	58


	PART II
Item 1.	Legal Proceedings	59

Item 1A.	Risk Factors	60

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	63

Item 3.	Defaults Upon Senior Securities	63

Item 4.	Mine Safety Disclosures	63

Item 5.	Other Information	63

Item 6.	Exhibits	64

GLOSSARY OF TERMS

Please see the “Glossary” beginning on page 6 of our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the Securities and Exchange Commission on March 1, 2023 (the "Annual Report"), for a list of abbreviations and definitions used throughout this Report. In addition, unless the context otherwise requires and for the purposes of this report only:

•“No. 2 Oil” is a high sulfur diesel oil, which is used in off-road equipment and in the marine industry such as tug boats and ships. It is also used to blend fuel oil and has multiple applications to fuel furnaces (“boilers”). It is a low viscosity, flammable liquid petroleum product.

•“No. 6 Oil” is a lesser grade of oil than No. 2 oil, it is used only in certain applications.

•“Adjusted gross margin” is gross profit (loss) plus unrealized gain or losses on hedging activities and inventory adjustments.

•“Adjusted gross margin per barrel of throughput” is calculated as adjusted gross margin divided by total throughput barrels for the period presented.

•“Adjusted EBITDA” represents net income (loss) from operations plus unrealized gain or losses on hedging activities, RFS costs (mainly RINs), and inventory adjustments, depreciation and amortization, interest expense, and certain other unusual or non-recurring charges included in selling, general, and administrative expenses.

•“Base oil” is a lubricant grade oil initially produced from refining crude oil or through chemical synthesis used in manufacturing lubricant products such as lubricating greases, motor oil, and metal processing fluids.

•“BBL” (also “bbl” or “Bbl”) is the abbreviated form for one barrel, 42 U.S. gallons of liquid volume.

•“BCD” (also “bcd”, “b/cd”) is the abbreviated form of barrels per calendar day; meaning the total number of barrels of actual throughput processed within 24 hours under typical operating conditions.

•“Black Oil” is a term used to describe used lubricating oils, which may be visually characterized as dark in color due to carbon and other residual elements and compounds which accumulate through use. This term can also refer to the business segment within the Company, which manages used motor oil related operations and processes such as purchase, sales, aggregation, processing, and re-refining.

•“Blendstock” is a bulk liquid component combined with other materials to produce a finished petroleum product.

•“BPD” (also “bpd”) is the abbreviated form for barrels per day. This can refer to designed or actual capacity/throughput.

•“Collectors” are typically local businesses that purchase used oil from generators and provide on-site collection services.

•“Crack” means breaking apart crude oil into its component products, including gases like propane, heating fuel, gasoline, light distillates like jet fuel, intermediate distillates like diesel fuel and heavy distillates like grease.

•“Cracking” refers to the process of breaking down larger, heavier, and more complex hydrocarbon molecules into simpler and lighter molecules through the use of heat, pressure, and sometimes a catalyst.

•“Crack spread” is a measure of the difference between market prices for refined products and crude oil, commonly used by the refining industry. We use crack spreads as a performance benchmark for our fuel gross margin and as a comparison with other industry participants. Crack spreads can fluctuate significantly, particularly when prices of refined products do not move in the same direction as the cost of crude oil.

•“Crack Spread USGC 2-1-1” represents the calculation of the crack spread that we believe most closely relates to the crude intakes and products at the Mobile Refinery, we use two barrels of Louisiana Light Sweet crude oil, producing one barrel of USGC CBOB gasoline and one barrel of USGC ULSD.

•“Cutterstock” also known as “cutter stock”, refers to any stream that is blended to adjust various properties of the resulting blend.

•“Distillates” are finished fuel products such as diesel fuels, jet fuel and kerosene.

•“Feedstock” is a product or a combination of products derived from crude oil and destined for further processing in the refining or re-refining industries. It is transformed into one or more components and/or finished products.

•“Fuel Gross Margin” is defined as gross profit (loss) plus operating expenses and depreciation attributable to cost of revenues and other non-fuel items included in cost of revenues including realized and unrealized gain or losses on hedging activities, Renewable Fuel Standard (RFS) costs (mainly related to Renewable Identification Numbers (RINs)), inventory adjustments, fuel financing costs and other revenues and cost of sales items.

•“Fuel Gross Margin Per Barrel of Throughput” is calculated as fuel gross margin divided by total throughput barrels for the period presented.

•“Gasoline Blendstock” is naphthas and various distillate products used for blending or compounding into finished motor gasoline. These components can include reformulated gasoline blendstock for oxygenate blending (RBOB) but exclude oxygenates (alcohols and ethers), butane, and pentanes (an organic compound with properties similar to a butane).

•“Generator” means any person, by site, whose act or process produces used oil or whose act first causes used oil to become subject to regulation. Generators can be service stations, governments or other businesses that produce or receive used oil.

•“Group III base oils” are greater than 90 percent saturates, with less than 0.03 percent sulfur and with a viscosity index above 120. Although made from crude oil, Group III base oils are sometimes described as synthesized hydrocarbons.

•“Hydrocarbons” are an organic compound consisting entirely of hydrogen and carbon. When used in the Company’s filings the term generally refers to crude oil and its derivatives.

•“Hydrotreating” means processing feedstock with hydrogen to remove impurities such as sulfur, chlorine, and oxygen and to stabilize the end product.

•“Industrial fuel” is a distillate fuel oil, typically a blend of lower-quality fuel oils. It can include diesel fuels and fuel oils such as No. 1, No. 2, and No. 4 diesel fuels that are historically used for space heating and power generation. Industrial fuel is typically a fuel with low viscosity, as well as low sulfur, ash, and heavy metal content, making it an ideal blending agent.

•“LLS” means Louisiana Light Sweet Crude and is a grade of crude oil classified by its low sulfur content.

•“LPG” means liquefied petroleum gases.

•“Lubricant” or “lube” means a solvent-neutral paraffinic product used in commercial heavy-duty engine oils, passenger car oils, and specialty products for industrial applications such as heat transfer, metalworking, rubber, and other general process oil.

•“Lubricating Base Oil” is a crude oil derivative used for lubrication.

•“Marine Diesel Oil” is a blend of petroleum products that is used as a fuel in the marine industry.

•“MBL” means one thousand barrels.

•“Metals” consist of recoverable ferrous and non-ferrous recyclable metals from manufacturing and consumption. Scrap metal can be recovered from pipes, barges, boats, building supplies, surplus equipment, tanks, and other items consisting of metal composition. These materials are segregated, processed, cut up, and sent back to a steel mill for re-purposing.

•“Naphthas” refers to any of various volatile, highly flammable liquid hydrocarbon mixtures used chiefly as solvents and diluents and as raw materials for conversion to gasoline.

•“Oil collection services” include the collection, handling, treatment, and transacting of used motor oil and related products which contain used motor oil (such as oil filters and absorbents) acquired from customers.

•“Olefins” are hydrotreated VGO.

•“Other refinery products” include the sales of asphalt, condensate, recovered products, and other petroleum products.

•“Processors” are entities (usually re-refineries) which utilize a processing technology to convert used oil or petroleum by-products into a higher-value feedstock or end-product.

•“Pygas” or pyrolysis gasoline, is a product that can be blended with gasoline as an octane booster or distilled and separated into its components, including benzene and other hydrocarbons.

•“Re-Refined Base Oil” is the end product of used oil that is first cleansed of its contaminants, such as dirt, water, fuel, and used additives through vacuum distillation. The oil is also generally hydrotreated to remove any remaining chemicals. This process is very similar to what traditional oil refineries do to remove base oil from crude oil. Finally, the re-refined oil is combined with a fresh additive package by blenders to bring it up to industry performance levels.

•“Re-Refining” refers to the process or industry which uses refining processes and technology with used oil as a feedstock to produce high-quality base stocks and intermediate feedstocks for lubricants, fuels, and other petroleum products.

•“Refining” is the process of purification of a substance. The refining of liquids is often accomplished by distillation or fractionation. Gases can be refined in this way as well, by being cooled and/or compressed until they liquefy. Gases and liquids can also be refined by extraction with a selective solvent that dissolves away either the substance of interest, or the unwanted impurities.

•“Refining Adjusted EBITDA” represents income (loss) from operations plus depreciation and amortization, unrealized gains and losses on hedging activities, gain and loss on intermediation agreement, and certain other unusual or non-recurring charges included in selling, general, and administrative expenses.

•“Reformate” is a gasoline blending stock produced by catalytic reforming.

•“Renewable Diesel” or “RD” means a diesel fuel derived from vegetable oils or animal fats that is produced through various processes, most commonly through hydrotreating, reacting the feedstock with hydrogen under temperatures and pressure in the presence of a catalyst.

•“RINs” means renewable identification numbers and refers to serial numbers assigned to credits generated from renewable fuel production under the Environmental Protection Agency’s Renewable Fuel Standard (“RFS”) regulations, which require blending renewable fuels into the nation’s fuel supply. In lieu of blending, refiners may purchase these transferable credits to comply with the regulations.

•“Sour Crude Oil” refers to crude oil containing quantities of sulfur greater than 0.4 percent by weight.

•“Sweet Crude Oil” refers to crude oil containing quantities of sulfur equal to or less than 0.4 percent by weight.

•“Toll Processing/Third Party Processing” is refining or petrochemicals production done on a fee basis. A plant owner puts another party’s feedstock through his equipment and charges for this service. A portion of the product retained by the processor may constitute payment. This form of compensation occurs frequently in refining because the feedstock supplier often is interested in retaining only one part of the output slate.

•“Transmix” is a mix of transportation fuels, usually gasoline and diesel, created by mixing different specification products during pipeline transportation, stripping fuels from barges and bulk fuel terminals. Transmix processing plants distill the transmix back into specification products, such as unleaded gasoline and diesel fuel.

•“UMO” is the abbreviation for used motor oil.

•“USGC CBOB” is the abbreviation for U.S. Gulf Coast Conventional Blendstock for Oxygenate Blending, which means conventional gasoline blendstock intended for blending with oxygenates downstream of the refinery where it was produced.

•“USGC ULSD” is the abbreviation for U.S. Gulf Coast Ultra-low sulfur diesel (ULSD), which is diesel fuel containing a maximum of 15 parts per million (ppm) of sulfur.

•“Used Oil” are any oil that has been refined from crude oil, or any synthetic oil that has been used, and as a result of use or as a consequence of extended storage or spillage has been contaminated with physical or chemical impurities. Examples of used oil include used motor oil, hydraulic oil, transmission fluid, and diesel and transformer oil.

•“Vacuum Distillation” is the process of distilling vapor from liquid crudes, usually by heating and condensing the vapor below atmospheric pressure turning it back to a liquid in order to purify, fractionate or form the desired products.

•“Vacuum Gas Oil” or “VGO” is a product produced from a vacuum distillation column which is predominately used as an intermediate feedstock to produce transportation fuels and other by-products such as gasoline, diesel and marine fuels.

•“VTB” refers to vacuum tower bottoms, the leftover bottom product of distillation, which can be processed in cokers and used for upgrading into gasoline, diesel, and gas oil.

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

diVERTEX ENERGY, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except number of shares and par value)

(UNAUDITED)


	March 31, 2023		December 31, 2022
ASSETS
Current assets
Cash and cash equivalents	$	86,689	$	141,258
Restricted cash	8,429		4,929
Accounts receivable, net	57,908		34,548

Inventory	188,026		135,473
Derivative commodity asset	14		—
Prepaid expenses and other current assets	52,504		36,660
Assets held for sale, current	—		20,560
Total current assets	393,570		373,428

Fixed assets, net	272,310		201,749
Finance lease right-of-use assets	58,319		44,081
Operating lease right-of use assets	68,635		53,557
Intangible assets, net	10,768		11,827
Deferred taxes assets	—		2,498
Other assets	2,335		2,245


TOTAL ASSETS	$	805,937	$	689,385

LIABILITIES, TEMPORARY EQUITY, AND EQUITY
Current liabilities
Accounts payable	$	32,001	$	20,997
Accrued expenses	104,196		81,711

Finance lease liability-current	1,916		1,363
Operating lease liability-current	13,137		9,012
Current portion of long-term debt, net	9,609		13,911
Obligations under inventory financing agreements, net	106,905		117,939
Derivative commodity liability	—		242
Liabilities held for sale, current	—		3,424
Total current liabilities	267,764		248,599

Long-term debt, net	161,470		170,010
Finance lease liability-long-term	59,325		45,164

Operating lease liability-long-term	55,498		44,545

Deferred tax liabilities	16,261		—
Derivative warrant liability	23,455		14,270
Other liabilities	1,377		1,377
Total liabilities	585,150		523,965

COMMITMENTS AND CONTINGENCIES (Note 4)	—		—


	March 31, 2023		December 31, 2022
EQUITY





Common stock, $0.001 par value per share; 750,000,000 shares authorized; 75,834,826 and 75,668,826 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively.	76		76
Additional paid-in capital	280,126		279,552
Accumulated deficit	(62,030)		(115,893)
Total Vertex Energy, Inc. shareholders' equity	218,172		163,735
Non-controlling interest	2,615		1,685
Total equity	220,787		165,420
TOTAL LIABILITIES, TEMPORARY EQUITY, AND EQUITY	$	805,937	$	689,385

See accompanying condensed notes to the consolidated financial statements.

VERTEX ENERGY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(UNAUDITED)


	Three Months Ended March 31,
	2023		2022
Revenues	$	691,142	$	74,537
Cost of revenues (exclusive of depreciation and amortization shown separately below)	619,352		60,990
Depreciation and amortization attributable to costs of revenues	4,337		1,027
Gross profit	67,453		12,520

Operating expenses:
Selling, general and administrative expenses (exclusive of depreciation and amortization shown separately below)	41,942		12,149
Depreciation and amortization attributable to operating expenses	1,016		409

Total operating expenses	42,958		12,558
Income (loss) from operations	24,495		(38)
Other income (expense):


Other income	1,653		472

Loss on change in value of derivative warrant liability	(9,185)		(3,579)

Interest expense	(12,477)		(4,221)
Total other expense	(20,009)		(7,328)
Income (loss) from continuing operations before income tax	4,486		(7,366)
Income tax benefit (expense)	(1,013)		—
Income (loss) from continuing operations	3,473		(7,366)
Income from discontinued operations, net of tax (see note 23)	50,340		6,557
Net income (loss)	53,813		(809)
Net loss attributable to non-controlling interest and redeemable non-controlling interest from continuing operations	(50)		(68)
Net income attributable to non-controlling interest and redeemable non-controlling interest from discontinued operations	—		3,807
Net income (loss) attributable to Vertex Energy, Inc.	53,863		(4,548)

Accretion of redeemable noncontrolling interest to redemption value from continued operations	—		(421)

Net income (loss) attributable to common shareholders from continuing operations	3,523		(7,719)
Net income attributable to common shareholders from discontinued operations, net of tax	50,340		2,750
Net income (loss) attributable to common shareholders	$	53,863	$	(4,969)

Basic income (loss) per common share
Continuing operations	$	0.05	$	(0.12)
Discontinued operations, net of tax	0.66		0.04
Basic income (loss) per common share	$	0.71	$	(0.08)

Diluted income (loss) per common share
Continuing operations	$	0.04	$	(0.12)
Discontinued operations, net of tax	0.64		0.04
Diluted income (loss) per common share	$	0.68	$	(0.08)

Shares used in computing earnings per share
Basic	75,689		63,372
Diluted	78,996		63,372

See accompanying condensed notes to the consolidated financial statements.

VERTEX ENERGY, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

(in thousands, except par value)

(UNAUDITED)


Three Months Ended March 31, 2023
	Common Stock			Series A Preferred
	Shares	$0.001 Par		Shares	$0.001 Par		Additional Paid-In Capital		Retained Earnings		Non-controlling Interest		Total Equity
Balance on January 1, 2023	75,670	$	76	—	$	—	$	279,552	$	(115,893)	$	1,685	$	165,420
Exercise of options	166	—		—	—		209		—		—		209

Stock based compensation expense	—	—		—	—		365		—		—		365
Non controlling shareholder contribution	—	—		—	—		—		—		980		980


Net income (loss)	—	—		—	—		—		53,863		(50)		53,813

Balance on March 31, 2023	75,836	$	76	—	$	—	$	280,126	$	(62,030)	$	2,615	$	220,787


Three Months Ended March 31, 2022
	Common Stock			Series A Preferred
	Shares	$0.001 Par		Shares	$0.001 Par		Additional Paid-In Capital		Retained Earnings		Non-controlling Interest		Total Equity
Balance on January 1, 2022	63,288	$	63	386	$	—	$	138,620	$	(110,614)	$	1,997	$	30,066
Exercise of options	60	—		—	—		76		—		—		76
Exercise of warrants	1,113	1		—	—		(1)		—		—		—

Stock based compensation expense	—	—		—	—		250		—		—		250
Conversion of Series A Preferred stock to common	5	—		(5)	—		—		—		—		—
Equity component of the convertible note issuance, net	—	—		—	—		78,789		—		—		78,789



Accretion of redeemable non-controlling interest to redemption value	—	—		—	—		—		(422)		—		(422)
Net income (loss)	—	—		—	—		—		(4,548)		3,739		(809)
Less: amount attributable to redeemable non-controlling interest	—	—		—	—		—		—		(3,769)		(3,769)
Balance on March 31, 2022	64,466	$	64	381	$	—	$	217,734	$	(115,584)	$	1,967	$	104,181

See accompanying condensed notes to the consolidated financial statements.

VERTEX ENERGY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(UNAUDITED)


	Three Months Ended
	March 31, 2023		March 31, 2022
Cash flows from operating activities
Net income (loss)	$	53,813	$	(809)
Income from discontinued operations, net of tax	50,340		6,557
Income (loss) from continuing operations	3,473		(7,366)
Adjustments to reconcile net loss from continuing operations to cash used in operating activities
Stock based compensation expense	365		250
Depreciation and amortization	5,353		1,436
Deferred income tax expense	1,013		—

(Gain) loss on sale of assets	3		(57)


Increase (decrease) in allowance for bad debt	882		(22)
Increase in fair value of derivative warrant liability	9,185		3,579
(Gain) loss on commodity derivative contracts	(1,516)		3,487
Net cash settlements on commodity derivatives	3,519		(5,497)
Amortization of debt discount and deferred costs	4,572		1,771
Changes in operating assets and liabilities
Accounts receivable and other receivables	(26,291)		(4,045)

Inventory	(52,553)		(11,096)
Prepaid expenses and other current assets	(18,103)		(722)
Accounts payable	11,005		11,224
Accrued expenses	22,486		(304)
Other assets	(44)		(1,301)
Net cash used in operating activities from continuing operations	(36,651)		(8,663)
Cash flows from investing activities



Investment in Mobile Refinery assets	—		(6,427)

Purchase of fixed assets	(73,936)		(388)
Proceeds from sale of discontinued operation	87,238		—


Proceeds from sale of fixed assets	—		132
Net cash provided by (used in) investing activities from continuing operations	13,302		(6,683)
Cash flows from financing activities
Payments on finance leases	(310)		(98)
Proceeds from exercise of options and warrants to common stock	209		77

Contributions received from noncontrolling interest	980		—

Net change on inventory financing agreements	(11,284)		—



Payments on note payable	(17,165)		(1,376)
Net cash used in financing activities from continuing operations	(27,570)		(1,397)


Discontinued operations:
Net cash provided by (used in) operating activities	(150)		4,672
Net cash used in investing activities	—		(9)

Net cash provided by (used in) discontinued operations	(150)		4,663

Net decrease in cash, cash equivalents and restricted cash	(51,069)		(12,080)
Cash, cash equivalents, and restricted cash at beginning of the period	146,187		136,627
Cash, cash equivalents, and restricted cash at end of period	$	95,118	$	124,547

See accompanying condensed notes to the consolidated financial statements.

VERTEX ENERGY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(UNAUDITED)

(Continued)

The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the consolidated balance sheets to the same amounts shown in the consolidated statements of cash flows (in thousands).


	Three Months Ended
	March 31, 2023		March 31, 2022

Cash and cash equivalents	$	86,689	$	24,050
Restricted cash	8,429		100,497
Cash and cash equivalents and restricted cash as shown in the consolidated statements of cash flows	$	95,118	$	124,547



SUPPLEMENTAL INFORMATION
Cash paid for interest	$	10,124	$	15
Cash paid for taxes	$	—	$	—

NON-CASH INVESTING AND FINANCING TRANSACTIONS
Equity component of the convertible note issuance	$	—	$	78,789






ROU assets obtained from new finance leases	$	15,024	$	—

ROU assets obtained from new operating leases	$	15,078	$	—
Accretion of redeemable noncontrolling interest to redemption value	$	—	$	421

See accompanying notes to the consolidated financial statements.

VERTEX ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2023

(UNAUDITED)

NOTE 1. BASIS OF PRESENTATION AND NATURE OF OPERATIONS

Vertex Energy, Inc. (the "Company" or "Vertex Energy") is an energy transition company focused on the production and distribution of conventional and alternative fuels. We operate used motor oil processing plants in Houston, Texas, Port Arthur, Texas, Marrero, Louisiana, and Columbus, Ohio.

As of April 1, 2022, we own a refinery in Mobile, Alabama (the “Mobile Refinery”) with an operable refining capacity of 75,000 barrels per day (“bpd”) and more than 3.2 million barrels of storage capacity. The total purchase consideration was $75.0 million in cash plus $16.3 million in previously agreed upon capital expenditures and miscellaneous prepaid and reimbursable items. At the time of the acquisition, the Company also purchased $130.0 million in hydrocarbon inventories of which $124.0 million were financed under an inventory financing agreement. See Note 3 “Mobile Refinery Acquisition” and Note 10 “Inventory Financing Agreement” for additional information.

The accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission ("SEC") and should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2022, contained in the Company's annual report, as filed with the SEC on Form 10-K on March 1, 2023 (the "Form 10-K").

The March 31, 2022 statement of operations was retroactively restated from the unaudited financial statements of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2022, to account for the change for our discontinued business, see Note 23 "Discontinued Operations". In the opinion of management all adjustments, consisting of normal recurring adjustments necessary for a fair presentation of financial position and the results of operations for the interim periods presented, have been reflected herein. All significant intercompany transactions have been eliminated in consolidation. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the consolidated financial statements which would substantially duplicate the disclosures contained in the audited consolidated financial statements for the most recent fiscal year 2022 as reported in Form 10-K have been omitted.

Used Motor Oils Business ("UMO Business")

As of December 31, 2022, our UMO Business consisted of our used oil refinery in Marrero, Louisiana, our Heartland used oil refinery in Ohio, our H&H and Heartland used motor oil (UMO) collections business; our oil filters and absorbent materials recycling facility in East Texas; and the rights to a lease at the Cedar Marine terminal in Baytown, Texas. The UMO Business is presented as part of our Black Oil segment in our consolidated financial statements.

On February 1, 2023, HPRM LLC (“HPRM”), which is indirectly wholly-owned by the Company, entered into a Sale and Purchase Agreement (the “Sale Agreement”) with GFL Environmental Services USA, Inc. (“GFL”) whereby HPRM agreed to sell to GFL, and GFL agreed to purchase from HPRM, all of HPRM’s equity interest in Vertex Refining OH, LLC (“Vertex OH”), our wholly-owned subsidiary, which owns the Heartland refinery located in Columbus, Ohio (the “Heartland Refinery”). Vertex Operating and GFL Environmental Inc. (“GFL Environmental”), an affiliate of GFL, were also parties to the Sale Agreement, solely for the purpose of providing certain guarantees of the obligations of HPRM and GFL as discussed in greater detail below.

The sale also includes all property and assets owned by Vertex OH, including inventory associated with the Heartland Refinery, and all real and leased property and permits owned by Vertex OH, and all used motor oil collection and recycling assets and operations owned by Vertex OH (collectively with the Heartland Refinery, the “Heartland Assets and Operations”).

The transactions contemplated by the Sale Agreement closed on February 1, 2023 with a net cash settlement of $87.3 million.

Vertex Operating guaranteed all of the obligations of HPRM pursuant to the terms of the Sale Agreement and GFL Environmental guaranteed all of the obligations of GFL pursuant to the terms of the Sale Agreement.

As a result of the above, the Company determined to present the Heartland Assets and Operations as discontinued operations as of December 31, 2022 and for the quarters ended March 31, 2023 and 2022.

Use of Estimates

The preparation of generally accepted accounting principles in the United States (“GAAP”) financial statements requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and reported amounts of revenue and expenses. Actual results could differ from these estimates. Any effects on the business, financial position or results of operations from revisions to these estimates are recorded in the period in which the facts that give rise to the revision become known.

Reclassification of Prior Year Presentation

Certain prior period amounts have been reclassified to conform to current period presentation. These reclassifications had no effect on the reported results of operations. The Company reclassified $7.2 million of net income from discontinued operations to continued operations in the accompanying three months ended March 31, 2022 Consolidated Statement of Operations. Refer to “Note 23. Discontinued Operations” for more detailed information.

NOTE 2. SUMMARY OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

With the exception of the accounting policies below, there have been no new or material changes to the significant accounting policies discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

Cash, Cash Equivalents and Restricted Cash

The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.

Restricted cash as of March 31, 2023, consisted of a $6.8 million deposit in a bank for financing of a short-term equipment lease, a $1.5 million deposit in a bank for possible liabilities related to the Heartland Assets and Operations sale, and a $0.1 million deposit in a money market account to serve as collateral for payment of a credit card. Restricted cash as of December 31, 2022, consisted of a $4.8 million deposit in a bank for financing of a short-term equipment lease, and a $0.1 million deposit in a money market account to serve as collateral for payment of a credit card.

New Accounting Pronouncements

The Company has not identified any recent accounting pronouncements that are expected to have a material impact on our financial condition, results of operations or cash flows upon adoption.

NOTE 3. MOBILE REFINERY ACQUISITION

On April 1, 2022, the Company completed the acquisition of a 75,000 bpd crude oil refinery located ten miles north of Mobile, in Saraland, Alabama (the “Mobile Refinery”) from Equilon Enterprises LLC d/b/a Shell Oil Products US, Shell Oil Company and Shell Chemical LP, subsidiaries of Shell plc (“Shell”)(the “Mobile Acquisition”), which provided the Company the opportunity to enter the crude oil refining industry. Total consideration for the acquisition was approximately $227.5 million, of which $124.3 million was paid by Macquarie Energy North America Trading, Inc (“Macquarie”) as a result of the simultaneous sale of such inventory to Macquarie pursuant to an Inventory Sales Agreement between our wholly-owned subsidiary, Vertex Refining, NV, LLC (“Vertex Refining”), and Macquarie. Refer to “Note 10. Inventory Financing Arrangement” for more detailed information.

The following table summarizes the determination and recognition of assets acquired (in thousands):


	Financing Agreement		Vertex Acquisition		Total
Inventory	$	124,311	$	5,909	$	130,220
Prepaid assets	—		147		147
Fixed assets	—		97,158		97,158
Total purchase price	$	124,311	$	103,214	$	227,525

NOTE 4. COMMITMENTS AND CONTINGENCIES

Litigation

The Company, in its normal course of business, is involved in various other claims and legal action. In the opinion of management, the outcome of these claims and actions will not have a material adverse impact upon the financial position of the Company. We are currently party to the following material litigation proceedings:

Doucet litigation:

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.

Penthol litigation:

On November 17, 2020, Vertex filed a lawsuit against Penthol LLC (“Penthol”) in the 61st Judicial District Court of Harris County, Texas, Cause No. 2020-65269, for breach of contract and simultaneously sought a Temporary Restraining Order and Temporary Injunction enjoining Penthol from, among other things, circumventing Vertex in violation of the terms of that certain June 5, 2016 Sales Representative and Marketing Agreement entered into between Vertex Operating and Penthol (the “Penthol Agreement”). Vertex seeks damages, attorney’s fees, costs of court, and all other relief to which it may be entitled.

On February 8, 2021, Penthol filed a complaint against Vertex Operating in the United States District Court for the Southern District of Texas; Civil Action No. 4:21-CV-416 (the “Complaint”). Penthol’s Complaint sought damages from Vertex Operating for alleged violations of the Sherman Act, breach of contract, business disparagement, and misappropriation of trade secrets under the Defend Trade Secrets Act and Texas Uniform Trade Secrets Act. On August 12, 2021, United States District Judge Andrew S. Hanen dismissed Penthol’s Sherman Act claim. Penthol’s remaining claims are pending. Penthol is seeking a declaration that Vertex has materially breached the agreement; an injunction that prohibits Vertex from using Penthol’s alleged trade secrets and requires Vertex to return any of Penthol’s alleged trade secrets; awards of actual, consequential and exemplary damages, attorneys’ fees and costs of court; and other relief to which it may be entitled. Vertex denies Penthol’s allegations in the Complaint. Vertex contends Penthol’s claims are completely without merit, and that Penthol’s termination of the Penthol Agreement was wrongful and resulted in damages to Vertex that it is seeking to recover in the Harris County lawsuit. Further, Vertex contends that Penthol’s termination of the Penthol Agreement constitutes a breach by Penthol under the express terms of the Penthol Agreement, and that Vertex remains entitled to payment of the amounts due Vertex under the Penthol Agreement for unpaid commissions and unpaid performance incentives. Vertex disputes Penthol’s allegations of wrongdoing and intends to vigorously defend itself in this matter. On February 26, 2021, Penthol filed its second amended answer and counterclaims, alleging that Vertex improperly terminated the Penthol Agreement and that Vertex tortiously interfered with Penthol’s prospective and existing business relationships. Vertex denies these allegations and is vigorously defending them.

The parties agreed to move the pending claims and defenses in the Texas state court lawsuit into the federal court lawsuit. Both parties also sought to amend their pleadings to add additional claims. By order dated October 18, 2022, the Judge in the lawsuit, largely granted these requests. As a result, Vertex was granted leave to add Penthol C.V. as a defendant. Penthol was granted leave to add claims for fraud and breach of contract relating to an assignment agreement, and add claims for misappropriation of trade secrets. All pending claims between the parties are now in the federal court action.

The parties recently conducted numerous depositions and substantial document discovery. Vertex has filed a motion for summary judgment, and Penthol has filed a motion for partial summary judgment, both of which are pending.

This case is pending, but is currently set for trial in October 2023.

Class Action:

On April 13, 2023, William C. Passmore filed a putative class action lawsuit against the Company; Benjamin P. Cowart, our Chief Executive Officer and Chairman; and Chris Carlson, our Chief Financial Officer; in the United States District Court for the Southern District of Alabama Southern Division.

The suit alleges that the Company, through Messrs. Cowart and Carlson, issued materially false and misleading statements regarding the projected future financial performance of the Mobile Refinery in 2022. The plaintiff has asserted claims for violations of Section 10(b) of the Exchange Act, and Rule 10b-5 promulgated thereunder, and Section 20(a) of the Exchange Act, against all defendants. Plaintiff is seeking multiple forms of relief, including compensatory damages for plaintiff and putative class members in an amount to be established at trial, an award of interest, attorneys’ fees and costs and expenses incurred in the action, and unspecified equitable and injunctive relief. The Company has retained counsel and its assessment of the plaintiff’s allegations is ongoing; however, all defendants intend to dispute and vigorously defend against the allegations.

*****

At this stage of the litigation, we are unable to anticipate the timing of any resolution or the ultimate impact, if any, that the legal proceedings may have on the consolidated financial position, liquidity, results of operations, or cash flows of the Company. As a result, at this time we have not estimated a range of potential exposure for amounts, if any, that might become payable in connection with this matter and reserves have not been established. It is possible that an adverse outcome may have a material adverse impact on the Company.

Environmental Matters

Like other petroleum refiners, we are subject to federal, state, and local environmental laws and regulations. These laws generally provide for control of pollutants released into the environment and require responsible parties to undertake remediation of hazardous waste disposal. These governmental entities may also propose or assess fines or require corrective actions for these asserted violations. Except as disclosed below, we do not anticipate that any such matters currently known to management will have a material impact on our financial condition, results of operations, or cash flows. As of March 31, 2023 and December 31, 2022, we reserved $1.4 million for anticipated environment clean up costs.

NOTE 5. REVENUES

The following tables present our revenues disaggregated by geographical market and revenue source (in thousands):


	Three Months Ended March 31, 2023
	Refining & Marketing		Black Oil & Recovery *		Corporate and Eliminations		Consolidated
Primary Geographical Markets


Gulf Coast	$	659,328	$	34,704	$	(2,890)	$	691,142
Sources of Revenue
Refined products:
Gasolines	$	147,721	$	—	$	—	$	147,721
Jet Fuels	142,375		—		—		142,375
Diesel	182,456		—		—		182,456
Other refinery products (1)	—		29,423		(878)		28,545
Re-refined products:
Pygas	3,835		—		—		3,835
Metals (2)	—		3,413		—		3,413
Other re-refined products (3)	181,008		281		(2,012)		179,277
Services:
Terminalling	1,933		—		—		1,933
Oil collection services	—		1,587		—		1,587
Total revenues	$	659,328	$	34,704	$	(2,890)	$	691,142


	Three Months Ended March 31, 2022
	Refining & Marketing		Black Oil & Recovery *		Corporate and Eliminations		Consolidated
Primary Geographical Markets


Gulf Coast	$	34,719	$	39,818	$	—	$	74,537
Sources of Revenue
Refined products:
Gasolines	$	7,548	$	—	$	—	$	7,548

Diesel	21,909		—		—		21,909
Other refinery products (1)	—		34,952		—		34,952
Re-refined products:
Pygas	4,690		—		—		4,690
Metals (2)	—		4,057		—		4,057
Other re-refined products (3)	572		258		—		830
Services:

Oil collection services	—		551		—		551
Total revenues	$	34,719	$	39,818	$	—	$	74,537

* Beginning during the quarter ended September 30, 2022, the Company decided to combine the Black Oil and Recovery segments due to the revenue from such segment being less than 10% of the Company's total revenue. The Black Oil segment excludes the Heartland Assets and Operations, which is presented herein as discontinued operations.

(1) Other refinery products include the sales of base oil, cutterstock and hydrotreated VGO, LPGs, sulfur and vacuum tower bottoms (VTB).

(2) Metals consist of recoverable ferrous and non-ferrous recyclable metals from manufacturing and consumption. Scrap metal can be recovered from pipes, barges, boats, building supplies, surplus equipment, tanks, and other items consisting of metal composition. These materials are segregated, processed, cut-up and sent back to a steel mill for re-purposing.

(3) Other re-refinery products include the sales of asphalt, condensate, recovered products, and other petroleum products.

NOTE 6. SEGMENT REPORTING

The Refining and Marketing segment consists primarily of the sale of gasoline, diesel and jet fuel produced at the Mobile Refinery as well as pygas and industrial fuels, which are produced at a third-party facility.

The Black Oil and Recovery segment consists primarily of the sale of (a) petroleum products which include base oil and industrial fuels—which consist of used motor oils, cutterstock and fuel oil generated by our facilities; (b) oil collection services—which consist of used oil sales, burner fuel sales, antifreeze sales and service charges; (c) the sale of other re-refinery products including asphalt, condensate, recovered products, and used motor oil; (d) transportation revenues; (e) the sale of VGO/marine fuel; (f) the sale of ferrous and non-ferrous recyclable Metal(s) products that are recovered from manufacturing and consumption; and (g) revenues generated from trading/marketing of Group III Base Oils. The Black Oil and Recovery segment excludes the Heartland Assets and Operations, which are presented herein as discontinued operations.

We also disaggregate our revenue by product category for each of our segments, as we believe such disaggregation helps depict how our revenue and cash flows are affected by economic factors.

Segment information for the three months ended March 31, 2023 and 2022 is as follows (in thousands):


THREE MONTHS ENDED MARCH 31, 2023
	Refining & Marketing		Black Oil & Recovery		Corporate and Eliminations		Total
Revenues:
Refined products	$	472,552	$	29,423	$	(878)	$	501,097
Re-refined products	184,843		3,694		(2,012)		186,525
Services	1,933		1,587		—		3,520
Total revenues	659,328		34,704		(2,890)		691,142
Cost of revenues (exclusive of depreciation and amortization shown separately below)	589,812		30,418		(878)		619,352
Depreciation and amortization attributable to costs of revenues	3,294		1,043		—		4,337
Gross profit	66,222		3,243		(2,012)		67,453
Selling, general and administrative expenses	26,486		4,799		10,657		41,942
Depreciation and amortization attributable to operating expenses	808		38		170		1,016
Income (loss) from operations	$	38,928	$	(1,594)	$	(12,839)	$	24,495

Capital expenditures	$	69,908	$	4,028	$	—	$	73,936


THREE MONTHS ENDED MARCH 31, 2022
	Refining & Marketing		Black Oil & Recovery		Corporate and Eliminations		Total
Revenues:
Refined products	$	29,457	$	34,952	$	—	$	64,409
Re-refined products	5,262		4,315		—		9,577
Services	—		551

Vertex Energy Inc. [VTNR] Filings
10-Q	[2023-05-09]
10-K	[2023-03-01]
10-Q	[2022-11-08]
10-Q	[2022-08-09]
10-Q	[2022-05-10]
10-K	[2022-03-14]
10-Q	[2021-11-09]
10-Q	[2021-08-10]
10-Q	[2021-05-13]
10-K	[2021-03-09]
10-Q	[2020-11-10]
10-Q	[2020-08-11]
10-Q	[2020-05-14]
10-K	[2020-03-04]
10-Q	[2019-11-08]
10-Q	[2019-08-07]
10-Q	[2019-05-08]
10-K	[2019-03-06]
10-Q	[2018-11-06]
10-Q	[2018-08-09]
10-Q	[2018-05-15]
10-K	[2018-03-07]
10-Q	[2017-11-07]
10-Q	[2017-08-08]
10-Q	[2017-05-10]
10-K	[2017-03-14]
10-Q	[2016-11-03]
10-Q	[2016-08-11]
S-1	[2016-06-10]
10-Q	[2016-05-12]
10-K	[2016-04-04]
10-Q	[2015-11-09]
S-1	[2015-09-28]
10-Q	[2015-08-11]
S-1	[2015-07-27]
10-Q	[2015-05-19]
10-K	[2015-03-31]
10-Q	[2014-11-14]
10-Q	[2014-08-14]
10-Q	[2014-05-13]
10-K	[2014-03-25]
10-Q	[2013-11-06]
10-Q	[2013-08-14]
10-Q	[2013-05-07]
10-K	[2013-03-21]
10-Q	[2012-11-14]
10-Q	[2012-08-14]
10-Q	[2012-05-08]
10-K	[2012-03-29]