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EX-32.2 - EXHIBIT 32.2 - Vertex Energy Inc.a9302015-ex322.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal quarter ended September 30, 2015
  
¨ 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
(I.R.S. Employer Identification No.)
incorporation or organization)
 
 
 
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

 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes ý No  ¨   
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes  ý    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, and accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  ¨
Accelerated filer   ý
Non-accelerated filer  ¨
Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.
Yes   ¨ No   ý

State the number of shares of the issuer’s common stock outstanding, as of the latest practicable date: 28,214,276 shares of common stock issued and outstanding as of November 6, 2015.



TABLE OF CONTENTS

 
 
 
 
 
Page
 
 
PART I
 
Item 1.
 
Financial Statements
 
 
 
 
 
 
 
Consolidated  Balance Sheets (unaudited)
 
 
 
 
 
 
Consolidated  Statements of  Operations (unaudited)
 
 
 
 
 
 
Consolidated  Statements of  Equity (unaudited)
 
 
 
 
 
 
Consolidated  Statements of Cash Flows (unaudited)
 
 
 
 
 
 
Notes to Consolidated Financial Statements (unaudited)
 
 
 
 
Item 2
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
 
Item 3.
 
Quantitative and Qualitative Disclosures About Market Risk
 
 
 
 
Item 4.
 
Controls and Procedures
 
 
 
 
 
 
PART II
 
Item 1.
 
Legal Proceedings
 
 
 
 
Item 1A.
 
Risk Factors
 
 
 
 
Item 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
 
Item 3.
 
Defaults Upon Senior Securities
 
 
 
 
Item 4.
 
Mine Safety Disclosures
 
 
 
 
Item 5.
 
Other Information
 
 
 
 
Item 6.
 
Exhibits




PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
VERTEX ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
 
September 30,
2015
 
December 31,
2014
ASSETS
 
 
 
 
Current assets
 
 
 
 
Cash and cash equivalents
 
$
4,020,161

 
$
6,017,076

Accounts receivable, net
 
7,897,650

 
9,936,948

Current portion of notes receivable, net
 
1,000,000

 
3,150,000

Inventory
 
3,847,157

 
12,620,616

Prepaid expenses
 
2,169,524

 
1,245,307

Costs in excess of billings
 

 
779,285

Total current assets
 
18,934,492

 
33,749,232

 
 
 
 
 
Noncurrent assets
 
 

 
 

 
 
 
 
 
Fixed assets, at cost
 
61,560,190

 
59,919,721

    Less accumulated depreciation
 
(6,742,217
)
 
(3,758,373
)
    Net fixed assets
 
54,817,973

 
56,161,348

Notes receivable
 
8,308,000

 
8,308,000

Intangible assets, net
 
17,687,897

 
18,512,960

Goodwill
 
4,922,353

 
4,922,353

Deferred financing cost, net
 
1,818,376

 
2,191,888

Deferred federal income tax
 

 
9,495,000

Other assets
 
481,450

 
481,450

Total noncurrent assets
 
88,036,049

 
100,072,999

TOTAL ASSETS
 
$
106,970,541

 
$
133,822,231

 
 
 
 
 
LIABILITIES, TEMPORARY EQUITY, AND EQUITY
 
 

 
 

Current liabilities
 
 

 
 

Accounts payable and accrued expenses
 
$
12,893,323

 
$
21,984,136

Dividends payable
 
401,951

 

Capital leases
 
364,561

 
492,755

Current portion of long-term debt
 
4,773,042

 
40,136,584

Revolving note
 
659,893

 

Deferred revenue
 

 
463,210

        Total current liabilities
 
19,092,770

 
63,076,685

Long-term liabilities
 
 

 
 

Long-term debt
 
21,644,605

 
1,867,574

Derivative liability
 
4,393,034

 

Contingent consideration
 
6,069,000

 
6,069,000

Deferred federal income tax
 

 
4,189,000

Total liabilities
 
51,199,409

 
75,202,259

 
 


 


COMMITMENTS AND CONTINGENCIES
 
 
 
 
 
 
 
 
 
TEMPORARY EQUITY
 
 
 
 
Series B Preferred shares, $.001 par value per share:
 
 
 
 
10,000,000 shares authorized, 8,032,274 and 0 shares issued and outstanding at September 30, 2015 and December 31, 2014,
 
 
 
 
respectively with liquidation preference of $24,900,050 at
 
 
 
 
September 30, 2015
 
11,191,623

 

 
 
 
 
 

F-1



EQUITY
 
 

 
 

Preferred stock, $0.001 par value per share:
 
 

 
 

50,000,000 shares authorized
 
 

 
 

Series A Convertible Preferred stock, $0.001 par value,
 
 
 
 
5,000,000 authorized and 612,943 and 630,419 issued
 
 
 
 
and outstanding with a liquidation preference of $913,285 and $939,324 at September 30, 2015 and December 31,
 
 
 
 
2014, respectively
 
613

 
630

Common stock, $0.001 par value per share;
 
 

 
 

750,000,000 shares authorized; 28,214,276 and 28,108,105
 
 
 
 
issued and outstanding at September 30, 2015 and
 
 
 
 
December 31, 2014, respectively
 
28,214

 
28,109

Additional paid-in capital
 
52,884,086

 
46,595,472

Retained earnings (accumulated deficit)
 
(8,333,404
)
 
11,995,761

Total Equity
 
$
44,579,509

 
$
58,619,972

TOTAL LIABILITIES, TEMPORARY EQUITY, AND EQUITY
 
$
106,970,541

 
$
133,822,231

See accompanying notes to the consolidated financial statements

F-2



VERTEX ENERGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014
(UNAUDITED)
 
 
Three Months Ended 
 September 30,
Nine Months Ended September 30,
 
 
2015
 
2014
2015
 
2014
Revenues
 
$
39,262,584

 
$
76,903,516

$
126,066,634

 
$
196,332,796

Cost of revenues
 
34,104,949

 
73,761,171

115,748,581

 
179,949,373

Gross profit
 
5,157,635

 
3,142,345

10,318,053

 
16,383,423

 
 
 
 
 
 
 
 
Reduction of contingent consideration
 

 
(1,876,752
)

 
(1,876,752
)
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Selling, general and administrative expenses
  (exclusive of acquisition related expenses)
 
6,052,764

 
4,706,104

17,064,043

 
11,786,070

  Depreciation and amortization expense
 
1,597,881

 
1,180,443

4,716,177

 
2,981,393

  Acquisition related expenses
 
5,910

 
259,235

163,588

 
2,819,065

Total operating expenses
 
7,656,555

 
6,145,782

21,943,808

 
17,586,528

 
 
 
 
 
 
 
 
Income (loss) from operations
 
(2,498,920
)
 
(1,126,685
)
(11,625,755
)
 
673,647

 
 
 
 
 
 
 
 
Other income (expense):
 
 

 
 

 
 
 
Provision for doubtful accounts
 

 

(2,650,000
)
 

Other income
 
11

 
109,980

29

 
110,357

Gain on bargain purchase
 

 
92,635


 
6,573,686

Other income (expense)
 
(20,657
)
 

(78,316
)
 
(10,866
)
Gain on change in value of derivative liability
 
818,051

 

2,635,033

 

Gain on futures contracts
 
395,430

 

395,430

 

Interest expense
 
(763,791
)
 
(947,325
)
(2,851,947
)
 
(1,680,371
)
Total other income (expense)
 
429,044

 
(744,710
)
(2,549,771
)
 
4,992,806

 
 
 
 
 
 
 
 
Income (loss) before income tax
 
(2,069,876
)
 
(1,871,395
)
(14,175,526
)
 
5,666,453

 
 
 
 
 
 
 
 
Income tax expense
 

 
(57,975
)
(5,306,000
)
 
(57,975
)
 
 
 
 
 
 
 
 
Net income (loss)
 
$
(2,069,876
)
 
$
(1,929,370
)
$
(19,481,526
)
 
$
5,608,478

 
 
 
 
 
 
 
 
Net income (loss) attributable to non-controlling interest
 
$

 
$

$

 
$
325,399

 
 
 
 
 
 
 
 
Net income (loss) attributable to Vertex Energy, Inc.
 
$
(2,069,876
)
 
$
(1,929,370
)
$
(19,481,526
)
 
$
5,933,877

 
 
 
 
 
 
 
 
Less: accretion of discount on series B
 
$
(444,899
)
 
$

$
(444,899
)
 
$

Less: accrual of dividend on series B
 
(402,740
)
 

(402,740
)
 

Less: other
 
(55,056
)
 

(55,056
)
 

 
 
 
 
 
 
 
 
Net income (loss) available to common shareholders
 
$
(2,972,571
)
 
$
(1,929,370
)
$
(20,384,221
)
 
$
5,933,877

 
 
 
 
 
 
 
 
Earnings (loss) per common share
 
 

 
 

 
 
 
Basic
 
$
(0.11
)
 
$
(0.08
)
$
(0.72
)
 
$
0.26

Diluted
 
$
(0.11
)
 
$
(0.08
)
$
(0.72
)
 
$
0.24

 
 
 
 
 
 
 
 
Shares used in computing earnings per share
 
 

 
 

 
 
 
Basic
 
28,198,701

 
25,151,660

28,165,427

 
23,077,914

Diluted
 
28,198,701

 
25,151,660

28,165,427

 
24,825,326

See accompanying notes to the consolidated financial statements

F-3



VERTEX ENERGY, INC.
CONSOLIDATED STATEMENTS OF EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015
 
 
Common Stock Shares
 
Common Stock $.001 Par
 
Series A Preferred Stock Shares
 
Series A Preferred Stock $.001 Par
 
Additional Paid-in Capital
 
Retained Earnings
 
Total Equity
Balance on January 1, 2015
 
28,108,105

 
$
28,108

 
630,419

 
$
630

 
$
46,595,472

 
$
11,995,761

 
$
58,619,971

Share based compensation expense, total
 

 

 

 

 
305,153

 

 
305,153

Issuance of restricted common stock
 
56,180

 
56

 

 

 
199,958

 

 
200,014

Conversion of preferred A stock to common
 
17,476

 
17

 
(17,476
)
 
(17
)
 

 

 

Conversion of Preferred B stock to common
 
32,515

 
33

 
 
 
 
 
100,763

 
 
 
100,796

Beneficial conversion feature on Preferred stock (APIC)
 

 

 

 

 
5,682,740

 

 
5,682,740

Dividends declared, Preferred B shares, stock
 
 
 
 
 
 
 
 
 
 
 
(402,740
)
 
(402,740
)
Accretion of redemption discount, Preferred series B
 
 
 
 
 
 
 
 
 

 
(444,899
)
 
(444,899
)
Net income (loss)
 

 

 

 

 

 
(19,481,526
)
 
(19,481,526
)
Balance on September 30, 2015
 
28,214,276

 
$
28,214

 
612,943

 
$
613

 
$
52,884,086

 
$
(8,333,404
)
 
$
44,579,509



F-4



VERTEX ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014
(UNAUDITED)
 
 
Nine Months Ended
 
 
September 30,
2015
 
September 30,
2014
Cash flows from operating activities
 
 
 
 
Net income (loss)
 
$
(19,481,526
)
 
$
5,608,478

  Adjustments to reconcile net income to cash
  provided by (used in) operating activities
 
 

 
 

Stock based compensation expense
 
305,153

 
173,979

Depreciation and amortization
 
4,716,177

 
2,981,393

Gain on acquisition
 

 
(6,573,686
)
Loss on asset sale
 
63,410

 

Gain on change in fair value of derivative liability
 
(2,635,033
)
 

Deferred federal income tax
 
5,306,000

 

Reduction of contingent liability
 

 
(1,876,752
)
Changes in operating assets and liabilities
 
 
 
 
Accounts receivable
 
1,879,150

 
(9,731,011
)
Allowance for doubtful accounts
 
2,810,146

 
(230,000
)
Notes receivable-related party
 

 
(3,150,000
)
Inventory
 
8,773,459

 
(6,269,253
)
Prepaid expenses
 
(924,216
)
 
(1,348,935
)
Costs in excess of billings
 
779,285

 

Accounts payable
 
(8,858,058
)
 
8,962,991

Deferred revenue
 
(495,965
)
 

     Other assets
 

 
(81,450
)
Net cash provided by (used in) operating activities
 
(7,762,018
)
 
(11,534,246
)
 
 
 

 
 

Cash flows from investing activities
 
 

 
 

Acquisitions
 
(1,082,649
)
 
(30,164,464
)
Purchase of fixed assets
 
(1,159,488
)
 
(4,227,056
)
Proceeds from asset sales
 
4,500

 

Notes receivable
 
(500,000
)
 

Net cash used in investing activities
 
(2,737,637
)
 
(34,391,520
)
 
 
 

 
 

Cash flows from financing activities
 
 

 
 

Proceeds from sale of stock
 
23,557,553

 
15,803,000

Payments on contingent consideration
 

 
(136,662
)
Payments on notes payable
 
(18,019,983
)
 
(10,469,474
)
Proceeds from note payable
 
2,305,277

 
41,372,315

Proceeds from revolving note
 
74,801,900

 

Payments on revolving note
 
(74,142,007
)
 

Debt issue cost
 

 
(2,452,157
)
Proceeds from exercise of common stock options and warrants
 

 
359,862

Net cash provided by (used in) financing activities
 
8,502,740

 
44,476,884

 
 
 

 
 

Net change in cash and cash equivalents
 
(1,996,915
)
 
(1,448,882
)
 
 
 

 
 

Cash and cash equivalents at beginning of the period
 
6,017,076

 
2,678,628

 
 
 

 
 

Cash and cash equivalents at end of period
 
$
4,020,161

 
$
1,229,746

 
 
 

 
 


F-5



SUPPLEMENTAL INFORMATION
 
 

 
 

Cash paid for interest
 
$
2,835,681

 
$
1,600,117

Cash paid for income taxes
 
$

 
$
80,158

 
 
 

 
 

NON-CASH INVESTING AND FINANCING TRANSACTIONS
 
 

 
 

Conversion of Series A Preferred Stock into common stock
 
$
17

 
$
689

   Dividends declared but not yet paid
 
$
401,951

 
$

   Note payable for acquisition of E-Source interest
 
$

 
$
854,050

   Additional paid in capital for acquisition of E-Source interest
 
$

 
$
1,790,745

   Shares issued as payment
 
$
200,000

 
$

   Beneficial conversion feature for Series B Preferred stock
 
$
5,737,796

 
$

   Fair value of warrants issued with series B Preferred stock
 
$
7,028,067

 
$


 See accompanying notes to the consolidated financial statements

F-6



VERTEX ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
(UNAUDITED)

NOTE 1.  BASIS OF PRESENTATION AND NATURE OF OPERATIONS

The accompanying unaudited consolidated interim financial statements of Vertex Energy, Inc. (the “Company,” "Vertex" or “Vertex Energy”) have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission (“SEC”), and should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company’s annual consolidated financial statements as filed with the SEC on Form 10-K/A on April 15, 2015 (the “Form 10-K”).  In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein.  The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Certain prior period amounts have been reclassified to conform to current period presentation. Notes to the consolidated financial statements which would substantially duplicate the disclosure contained in the audited consolidated financial statements for the most recent fiscal year 2014 as reported in Form 10-K, have been omitted.

NOTE 2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

New Accounting Pronouncements

In April, 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability. This ASU is effective for the Company beginning in the first quarter of 2016, with early adoption permitted. The Company does not expect that the ASU will have a material impact on the consolidated financial statements.

Principles of consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The subsidiaries are as follows:

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 Thermal Chemical Extraction Process ("TCEP").
Crossroad Carriers, L.P. (“Crossroad”) is a third-party common carrier that provides transportation and logistical services for liquid petroleum products, as well as other hazardous materials and product streams.
Vertex Recovery, 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, San Antonio and Corpus Christi, Texas.
E-Source Holdings, LLC (“E-Source”) provides dismantling and demolition services at industrial facilities throughout the Gulf Coast.
Vertex Refining, LA, LLC is a used oil re refinery based in Marrero, Louisiana and also has assets in Belle Chasse, Louisiana.
Vertex Refining, NV, LLC ("Vertex Refining") is a base oil marketing and distribution company with customers throughout the United States.
Golden State Lubricant Works, LLC ("Golden State") operates an oil storage and blend facility based in Bakersfield, California.
Vertex Refining, OH, LLC collects and re refines used oil and residual materials from customers throughout the Midwest. Refinery operations are based in Columbus, Ohio and have collection branches located in Norwalk, Ohio Zanesville, Ohio, Ravenswood, West Virginia, and Mt. Sterling, Kentucky.
Vertex Energy Operating, LLC ("Vertex Operating"), a holding company for various of the subsidiaries described above.

Accounts receivable

Accounts receivable represents amounts due from customers. Accounts receivable are recorded at invoiced amounts, net of reserves and allowances, and do not bear interest. The Company uses its best estimate to determine the required allowance for doubtful

F-7



accounts based on a variety of factors, including the length of time receivables are past due, economic trends and conditions affecting its customer base, significant one-time events and historical write-off experience. Specific provisions are recorded for individual receivables when we become aware of a customer’s inability to meet its financial obligations. The Company reviews the adequacy of its reserves and allowances quarterly.

Receivable balances greater than 30 days past due are individually reviewed for collectability and if deemed uncollectible, are charged off against the allowance accounts after all means of collection have been exhausted and the potential for recovery is considered remote.  The Company does not have any significant off balance sheet credit exposure related to its customers. The allowance was $476,861 and $316,715 at September 30, 2015 and December 31, 2014, 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. The Company recognized an inventory impairment loss of $0 and $467,911 at September 30, 2015 and December 31, 2014, respectively.   

Revenue recognition

Revenue for each of the Company’s divisions is recognized when persuasive evidence of an arrangement exists, goods are delivered, sales price is determinable, and collection is reasonably assured. Revenue is recognized upon delivery by truck and railcar of feedstock to its re-refining customers and upon product leaving the Company’s terminal facilities and third party processing facility via barge. Revenue is also recognized as recovered scrap materials are sold.

Income Taxes

The Company accounts for income taxes in accordance with the FASB ASC Topic 740. The Company records a valuation allowance against net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and when temporary differences become deductible. The Company considers, among other available information, uncertainties surrounding the recoverability of deferred tax assets, scheduled reversals of deferred tax liabilities, projected future taxable income, and other matters in making this assessment.

As part of the process of preparing its consolidated financial statements, the Company is required to estimate its income taxes in each of the jurisdictions in which it operates. This process requires the Company to estimate its actual current tax liability and to assess temporary differences resulting from differing book versus tax treatment of items, such as deferred revenue, compensation and benefits expense and depreciation. These temporary differences result in deferred tax assets and liabilities, which are included within the Company’s consolidated statements of financial condition. Significant management judgment is required in determining the Company’s provision for income taxes, its deferred tax assets and liabilities and any valuation allowance recorded against its net deferred tax assets. In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized and, when necessary, valuation allowances are established.  The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible. Management considers the level of historical taxable income, scheduled reversals of deferred taxes, projected future taxable income and tax planning strategies that can be implemented by the Company in making this assessment. If actual results differ from these estimates or the Company adjusts these estimates in future periods, the Company may need to adjust its valuation allowance, which could materially impact the Company’s consolidated financial position and results of operations. 
 
Tax contingencies can involve complex issues and may require an extended period of time to resolve. Changes in the level of annual pre-tax income can affect the Company’s overall effective tax rate. Significant management judgment is required in determining the Company’s provision for income taxes, its deferred tax assets and liabilities and any valuation allowance recorded against its net deferred tax assets. Furthermore, the Company’s interpretation of complex tax laws may impact its recognition and measurement of current and deferred income taxes.

The loss during the quarter ended March 31, 2015 put the Company in an accumulated loss position for the cumulative 12 quarters then ended. The Company did not have sufficient positive evidence to overcome the recent losses and determined it was more likely than not the deferred tax assets would not be realized as of March 31, 2015 and as a result the Company incurred deferred tax expense of $5,306,000 during the three month period ended March 31, 2015.


F-8



Earnings per share

Diluted net income (loss) per share is computed by dividing the net income (loss) attributable to common shareholders by the weighted average number of common and common equivalent shares outstanding during the period. Common share equivalents included in the diluted computation represent shares issuable upon assumed exercise of stock options and warrants using the treasury stock and “if converted” method. For periods in which net losses are incurred, weighted average shares outstanding is the same for basic and diluted loss per share calculations, as the inclusion of common share equivalents would have an anti-dilutive effect.

Derivative liabilities

The Company, in accordance with ASC 815-40-25 and ASC 815-10-15 Derivatives and Hedging and ASC 480-10-25 Liabilities-Distinguishing from Equity, convertible preferred shares are accounted for net, outside of shareholders' equity and warrants are accounted for as liabilities at their fair value during periods where they can be net cash settled in case of a change in control transaction.
The warrants are accounted for as a liability at their fair value at each reporting period. The value of the derivative warrant liability will be re-measured at each reporting period with changes in fair value recorded as earnings. To derive an estimate of the fair value of these warrants, a Dynamic Black Scholes model is utilized that computes the impact of a possible change in control transaction upon the exercise of the warrant shares. This process relies upon inputs such as shares outstanding, estimated stock prices, strike price and volatility assumptions to dynamically adjust the payoff of the warrants in the presence of the dilution effect.
Derivative Financial Instruments
The Company records all derivative financial instruments at their fair value in its consolidated balance sheets. None of the derivative financial instruments that the Company holds are designated as either a fair value hedge or cash flow hedge and the gain or loss on the derivative instrument is recorded in earnings. The Company has determined that the fair value of its derivative financial instruments are determined using level 1 inputs (quoted prices in active markets for identical assets and liabilities that are observable either directly or indirectly for substantially the full term of the asset or liability) in the fair value hierarchy as the fair value is based on publicly available commodity futures prices rates at each financial reporting date. The fair value of the Company’s futures contracts is included in other prepaid assets in the accompanying consolidated balance sheets; and the gain or losses are included in gain on futures contracts in the accompanying consolidated statements of operations.

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 requires the Company to redeem such preferred stock on the fifth anniversary of the issuance of the Series B Preferred stock if the redemption would not be subject to then existing restrictions under the Company's senior credit agreement that prohibits redemption. 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.


F-9



NOTE 3. LIQUIDITY

During the six month period ending June 30, 2015, an event of default occurred under our financing agreements (as described in Note 10). We were able to obtain a waiver of the defaults under the credit agreements and to negotiate mutually agreed upon amendments to the credit agreements to bring the Company into compliance with such credit agreements. In June 2015, we raised an additional $25.0 million in cash from the issuance of Series B Preferred Stock, as further described in Note 13. We used the net proceeds to repay amounts owed under the credit agreements in the amount of $15.1 million. In addition, on November 9, 2015, the Company further amended the credit agreements, as further described in Note 16. Based upon the revised terms of the credit agreements, the current net working capital, our cash flow projections for the next twelve months including recovery of insurance proceeds, and the Company's ability to issue stock and access capital markets, we believe that the Company will have sufficient liquidity to meet the Company's obligations for the foreseeable future.
In the event further defaults occur under the credit agreements, the lenders may exercise any and all rights and remedies available to them under their respective agreements, including demanding immediate repayment of all amounts then outstanding or initiating foreclosure or insolvency proceedings. In the event we default upon our obligations under our credit facilities, our lenders demand repayment of such obligations and we are unable to obtain alternative financing to repay or refinance such obligations, our business will be materially and adversely affected, and we may be forced to sharply curtail or cease our operations.

NOTE 4. ACQUISITIONS

Aaron Oil Acquisition

Effective August 6, 2015, H&H Oil acquired a collection route consisting of collecting, shipping and selling used oil, oil filters, antifreeze and other related services in the state of Louisiana, but excluding industrial customers, maritime customers, off shore customers, dockside locations, industrial services, used absorbent services, wastewater generating customers and collectors/transporters of crankcase used oil, petroleum fuel reclamation customers and crude oil producers/processing/recovery/reclamation customers of Aaron Oil Company, Inc. (“Aaron Oil”). Included in the purchase were certain trucks and other assets owned by Aaron Oil and certain contract rights. The President, Chief Executive Officer and owner of Aaron Oil is Dan Cowart, the brother of our Chief Executive Officer and largest stockholder, Benjamin P. Cowart. The acquisition price paid at closing was approximately $1 million, which included a reimbursement for certain prepaid contract rights. Aaron Oil also agreed to provide account servicing services to us for a period of sixty days following the closing at an agreed upon price per gallon of oil serviced. Aaron Oil also agreed to a non-compete provision prohibiting Aaron Oil from competing against the Company in the Louisiana market for a period of two years from the closing.

NOTE 5. RELATED PARTIES

Effective October 3, 2014, the Company entered into a consulting agreement with its director, Timothy C. Harvey, pursuant to which Mr. Harvey agreed to provide consulting services to the Company in connection with overseeing the Company’s trading and selling of finished products and assisting the Company with finding the best markets for products from the Company’s facilities for a term of one year. In consideration for agreeing to provide services under the agreement, the Company agreed to pay Mr. Harvey $10,000 per month, and to grant him an option to purchase up to 75,000 shares of the Company's common stock at an exercise price of $6.615 per share, the mean between the highest and lowest quoted selling prices of the Company's common stock on October 2, 2014 (the day immediately preceding the approval by the Board of Directors of the agreement), which vest at the rate of 1/4th of such options per year, subject to Mr. Harvey’s continued consulting, employment or service as a director of the Company, which options were granted under the Company's 2013 Stock Incentive Plan. Effective August 1, 2015, Mr. Harvey's agreement was changed to an hourly basis whereby he will only be paid on an as-needed basis.

On August 6, 2015, the Company acquired a collection route in the state of Louisiana. The President, Chief Executive Officer and owner of which is Dan Cowart, the brother of our Chief Executive Officer and largest stockholder, Benjamin P. Cowart, as described in Note 4.

NOTE 6. CONCENTRATIONS, SIGNIFICANT CUSTOMERS, COMMITMENTS AND CONTINGENCIES
 
At September 30, 2015 and 2014 and for each of the nine months then ended, the Company’s revenues and receivables were comprised of the following customer concentrations:

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Three Months Ended September 30, 2015
 
Nine Months Ended September 30, 2014
 
 
% of
Revenues
 
% of
Receivables
 
% of
Revenues
 
% of
Receivables
Customer 1
 
21%
 
1%
 
9%
 
47%
Customer 2
 
17%
 
14%
 
13%
 
8%
Customer 3
 
8%
 
6%
 
7%
 
12%
Customer 4
 
7%
 
—%
 
10%
 
—%
Customer 5
 
—%
 
—%
 
28%
 
—%
Customer 6
 
2%
 
3%
 
2%
 
11%
 
At September 30, 2015 and 2014 and for each of the nine months then ended, the Company's segment revenues were comprised of the following customer concentrations:

 
 
% of Revenue by Segment
 
% Revenue by Segment
 
 
Three Months Ended September 30, 2015
 
Nine Months Ended
September 30, 2014
 
 
Black Oil
 
Refining
 
Recovery
 
Black Oil
 
Refining
 
Recovery
Customer 1
 
100%
 
—%
 
—%
 
98%
 
—%
 
2%
Customer 2
 
58%
 
42%
 
—%
 
21%
 
79%
 
—%
Customer 3
 
—%
 
100%
 
—%
 
—%
 
100%
 
—%
Customer 4
 
—%
 
100%
 
—%
 
—%
 
100%
 
—%
Customer 5
 
100%
 
—%
 
—%
 
100%
 
—%
 
—%
Customer 6
 
100%
 
—%
 
—%
 
100%
 
—%
 
—%

The Company purchases goods and services from one company that represented 15% of total purchases for the nine months ended September 30, 2015 and one company that represented 10% of total purchases for the nine months ended September 30, 2014

The Company has had various debt facilities available for use, of which there was $27,442,101 and $42,496,913 outstanding as of September 30, 2015 and December 31, 2014, respectively. See Note 10 for further details.

In February 2013, Bank of America agreed to lease the Company up to $1,025,000 of equipment to enhance the TCEP operation, which went into effect in April 2013.  Under the current terms of the lease agreement, there are 60 monthly payments due of approximately $13,328.

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.

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.

For tax reporting purposes, we have NOLs of approximately $58.4 million as of September 30, 2015 that are available to reduce future taxable income. In determining the carrying value of our net deferred tax asset, the Company considered all negative and positive evidence. The Company has incurred a cumulative pre-tax loss of $17.0 million over a three year period ended September 30, 2015. As a result, we determined that a full valuation allowance for our deferred tax assets at September 30, 2015 of $5.3 million was appropriate.

NOTE 7. ACCOUNTS RECEIVABLE

Accounts receivable, net, consists of the following at:

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September 30, 2015
 
December 31, 2014
Accounts receivable
 
$8,374,511
 
$10,253,663
Allowance for doubtful accounts
 
(476,861)
 
(316,715)
Accounts receivable, net
 
$7,897,650
 
$9,936,948

Accounts receivable represents amounts due from customers. Accounts receivable are recorded at invoiced amounts, net of reserves and allowances, and do not bear interest. The Company uses its best estimate to determine the required allowance for doubtful accounts based on a variety of factors, including the length of time receivables are past due, economic trends and conditions affecting its customer base, significant one-time events and historical write-off experience. Specific provisions are recorded for individual receivables when we become aware of a customer’s inability to meet its financial obligations. The Company reviews the adequacy of its reserves and allowances quarterly.
Receivable balances greater than 30 days past due are individually reviewed for collectability and if deemed uncollectible, are charged off against the allowance accounts after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any significant off balance sheet credit exposure related to its customers. 

NOTE 8. NOTES RECEIVABLE

Current portion of notes receivable, net, consists of the following at:

 
 
September 30, 2015
 
December 31, 2014
Notes receivable - current
 
$5,346,452
 
$4,846,452
Allowance
 
(4,346,452)
 
(1,696,452)
Notes receivable - current, net
 
$1,000,000
 
$3,150,000

The current portion of notes receivable represents amounts due from Omega Holdings, LLC. Of the total notes receivable balance, $1,696,452 represents invoiced amounts that do not bear interest as of September 30, 2015. Based on management's assessment, the Company recognized an allowance of $1,696,452 related to the receivable. The write off was necessary because the Company's receivable was unsecured and the amount that the Company may ultimately recover, if any, is not presently determinable.

As of September 30, 2015, $3,650,000 of the current notes receivable balance represents short-term loans that carry an interest rate of 9.5% per annum. No accrued interest is included in the balance. Based on management's assessment, the Company recognized an allowance of $2,650,000 during the three months ended March 31, 2015. The note is collateralized by insurance proceeds expected to be collected in 2015 and the allowance was a result of revised insurance proceeds expectations.

The long-term notes receivable represents amounts due from Omega Holdings, LLC. The $8,308,000 due to Vertex is based on the purchase price allocated to the Nevada facility, which has not yet closed. The note is collateralized by assets at the Nevada facility and carries an interest rate of 9.5% per annum. It is anticipated the balance of the note will be satisfied in connection with a foreclosure of the property and equipment pledged as collateral to secure the note. No accrued interest is included in the account balance. The aggregate receivable balance has been classified as noncurrent because they are not expected to be collected within one year from the balance sheet date. The note is currently in default as of September 30, 2015.

NOTE 9. DERIVATIVE FINANCIAL INSTRUMENTS
The Company is exposed to certain risks relating to its ongoing business operations. The primary risk managed by using derivative instruments is to offset changes in the fair value or cash flows of our commodity feedstock and processed inventories. The Company has entered into certain financial derivative instruments to manage this risk. In addition, see Note 13 for details regarding our Warrants granted in connection with the Series B Preferred Stock.
The derivative financial instruments the Company has entered into are futures contracts which have terms of less than a year to offset the effects of the market value changes in our hedged items, as well as to avoid significant volatility that might arise due to market exposure.
The Company records all derivative financial instruments at their fair value in its consolidated balance sheets. None of the derivative financial instruments that the Company holds are designated as either a fair value hedge or cash flow hedge and the

F-12



gain or loss on the derivative instrument is recorded in earnings. The Company has determined that the fair value of its derivative financial instruments are determined using level 2 inputs (inputs other than quoted prices in active markets for identical assets and liabilities that are observable either directly or indirectly for substantially the full term of the asset or liability) in the fair value hierarchy as the fair value is based on publicly available commodity futures prices rates at each financial reporting date. At September 30, 2015, the fair value of the Company’s futures contracts totaled a nominal net asset and will be included in other prepaid assets in future consolidated balance sheets; and the gain of approximately $395,400 is included in gain on futures contracts in the accompanying consolidated statements of operations. The notional principal of outstanding futures contracts at September 30, 2015 was $2,600,000.
At September 30, 2015, the Company’s financial instruments do not contain any credit-risk-related or other contingent features that could cause accelerated payments when the Company’s financial instruments are in net liability positions. The Company does not use derivative financial instruments for trading or speculative purposes.

NOTE 10. LINE OF CREDIT AND LONG-TERM DEBT

In September 2012, the Company entered into a credit agreement with Bank of America. Pursuant to the agreement, Bank of America agreed to loan the Company $8,500,000 in the form of a term loan and to provide the Company with an additional $10,000,000 in the form of a revolving line of credit.

In May 2014, the Company entered into an amended and restated credit agreement with Bank of America. The amended credit agreement amended and restated the prior credit agreement entered into with Bank of America in September 2012. Pursuant to the agreement, Bank of America agreed to loan the Company up to $20,000,000 in the form of a revolving line of credit, subject to certain terms and lending ratios, to be used for feedstock purchases and general corporate purposes. The line of credit bears interest at the option of the Company of either the lender's prime commercial lending rate then in effect between 1.25% and 2% per annum or the Bank of America LIBOR rate plus between 2.35% and 3% (both ranges dependent upon the Company's leverage ratio from time to time). Accrued and unpaid interest on the revolving note is due and payable monthly in arrears and all amounts outstanding under the revolving note are due and payable on May 2, 2017. The balance on the revolving line of credit was $0 at September 30, 2015.

The financing arrangement discussed above is secured by a first priority security interest in all of the assets and securities of our direct and indirect subsidiaries other than E-Source. The loan includes various covenants binding upon the Company, including, requiring that the Company comply with certain reporting requirements, provide notices of material corporate events and forecasts to Bank of America, and maintain certain financial ratios relating to debt leverage, consolidated EBITDA, maximum debt exposure, and minimum liquidity, including maintaining a ratio of quarterly consolidated EBITDA to certain fixed charges.

On May 2, 2014, the Company entered into a Credit and Guaranty Agreement with Goldman Sachs Bank USA. Pursuant to the agreement, Goldman Sachs Bank USA loaned the Company $40,000,000 in the form of a term loan. As set forth in the Credit Agreement, the Company has the option to select whether loans made under the Credit Agreement bear interest at (a) the greater of (i) the prime rate in effect, (ii) the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System plus ½ of 1%, (iii) the sum of (A) the Adjusted LIBOR Rate and (B) 1%, and (iv) 4.5% per annum; or (b) the greater of (i) 1.50% and (ii) the applicable ICE Benchmark Administration Limited interest rate, divided by (x) one minus, (y) the Adjusted LIBOR Rate. Interest on the Credit Agreement is payable monthly in arrears. Amortizing principal payments are due on the Credit Agreement Loan in the amount of $300,000 per fiscal quarter for June 30, 2014, September 30, 2014, December 31, 2014 and March 31, 2015, and $800,000 per fiscal quarter thereafter until maturity on May 2, 2019. The balance on the term loan was $23,200,000 at September 30, 2015.

The Goldman Sachs Bank USA financing arrangement is secured by all of the assets of the Company, but was subordinate to the aforementioned Bank of America credit agreement.

On March 26, 2015, we, Vertex Operating, and substantially all of our other subsidiaries (other than E-Source), Goldman Sachs Specialty Lending Holdings, Inc. (“Lender”) and Goldman Sachs Bank USA, as Administrative Agent and Collateral Agent for Lender (“Agent”), entered into a Second Amendment to Credit and Guaranty Agreement (the “Second Amendment”). The Second Amendment amended that certain Credit and Guaranty Agreement entered into between the parties dated as of May 2, 2014 and amended by the First Amendment to Credit and Guaranty Agreement entered into on December 5, 2014 (the “First Amendment” and the Credit and Guaranty Agreement as amended and modified by the First Amendment and Second Amendment, the “Credit Agreement”).


F-13



During the third quarter of 2014, various events of default had occurred and were continuing under the Credit Agreement and the parties entered into the Second Amendment to among other things, provide for the waiver of the prior defaults and to restructure certain covenants and other financial requirements of the Credit Agreement and to allow for our entry into the MidCap Loan Agreement (described below).

The amendments to the Credit Agreement effected by the Second Amendment include, but are not limited to:

Effecting various amendments to the Credit Agreement to substitute the name of MidCap Business Credit, LLC and the MidCap Loan Agreement (as described below) in place of Bank of America, NA (“BOA”), and the Company’s prior Credit Agreement with BOA.

Increasing the interest rate of certain outstanding loans made under the terms of the Credit Agreement by up to 2% per annum, based on the leverage ratio of debt to consolidated EBITDA of the Company.

Changing the calculation dates for certain fixed charge ratios required to be calculated pursuant to the terms of the Credit Agreement.

Changing how certain debt leverage ratios are calculated under the terms of the Credit Agreement.

Increasing the additional default interest payable upon the occurrence of an event of default under the Credit Agreement to 4% per annum (compared to 2% per annum for all other defaults) above the then applicable interest rate in the event we fail to make the Required Prepayment (as defined below).

Providing that no quarterly amortization payments would be due under the terms of the Credit Agreement for the quarters ended March 31, 2015 and June 30, 2015 (previously amortization payments of $800,000 per quarter were due for both such quarters).

Providing that we are not required to meet certain debt and leverage covenants for certain periods of fiscal 2015.

Requiring that we raise at least $9.1 million by June 30, 2015 through the sale of equity, and that we are required to pay such funds directly to the Lender as a mandatory pre-payment of the amounts outstanding under the Credit Agreement (the “Required Payment”), which required payment was paid in June 2015, as described below.

Changing certain of the required prepayment terms of the Credit Agreement, which require us to prepay the amounts owed under the Credit Agreement in an amount equal to 100% of the extent total consolidated debt exceeds (x) total consolidated EBITDA (as calculated pursuant to the agreement) multiplied by (y) the maximum debt leverage ratios described in the Credit Agreement, provided that no prepayments in connection with such requirements are required to be made through December 31, 2015.

Reducing the amount of allowable additional borrowings we can make under other debt agreements and facilities to $7 million in aggregate (including not more than $6 million under the MidCap Loan Agreement through December 31, 2015).

Changing certain fixed charge, leverage ratios and consolidated EBITDA calculations, definitions, and requirements relating to covenants under the Credit Agreement.

Changing the required amount of cash on hand and available borrowings under the MidCap Loan Agreement. We are required to have at least (a)$750,000 after the date of the Second Amendment and prior to June 30, 2015, (b) $1.5 million at any time after June 30, 2015 and prior to December 31, 2015, (c) $2 million at any time after December 31, 2015 and prior to June 30, 2016, (d) $2.5 million at any time after June 30, 2016 and prior to December 31, 2016, and (e) $3 million at any time after December 31, 2016.

The Lender also waived all of the prior defaults which the Lender had provided the Company notice of previously (which were all of the known defaults that existed at the time of the parties’ entry into the Second Amendment) and the Company and its subsidiaries provided a release in favor of the Lender and its representatives and assigns. We also agreed to pay the Agent a fee of $50,000 per year (including $50,000 paid upon our entry into the Second Amendment) as an administration fee; and pay the Agent certain prepayment fees in the event we prepay amounts outstanding under the Credit Agreement prior to March 26, 2018,

F-14



provided no prepayment fee is due in connection with the Required Payment or certain other mandatory prepayments required under the terms of the Credit Agreement, subject to certain exceptions.

As additional consideration for the Lender agreeing to the terms of the Second Amendment, we granted Goldman, Sachs & Co., an affiliate of the Lender (such initial holder and its assigns, if any, the “Holder”) a warrant to purchase 1,766,874 shares of our common stock which was evidenced by a Common Stock Purchase Warrant (the “Lender Warrant”). The Lender Warrant was to expire on March 26, 2022 and originally had an exercise price equal to the lower of (x) $3.39583 per share; and (y) the lowest price per share at which we issue any common stock (or sets an exercise price for the purchase of common stock) between the date of our entry into the Lender Warrant and June 30, 2015. The Lender Warrant was exercisable by the Holder at any time after September 1, 2015, including pursuant to a cashless exercise. The Lender Warrant provided that in the event that, prior to June 30, 2015, we prepaid the amount owed under the Credit Agreement in an amount greater than $9.1 million (i.e., in an amount greater than the Required Payment) then the number of shares of common stock issuable upon exercise of the Lender Warrant is reduced by the pro rata amount by which the amount prepaid exceeds $9.1 million and is less than $15.1 million, provided that if prior to June 30, 2015 we prepaid at least $6 million in addition to the Required Payment the Lender Warrant automatically terminated.
On June 18, 2015, the Company entered into the Third Amendment to Credit and Guaranty Agreement (the “Third Amendment”), which amended the Credit Agreement (defined above). The amendments to the Credit Agreement effected by the Third Amendment include, but are not limited to:

Extending the time period pursuant to which we are required to make certain post-closing deliverables pursuant to the terms of the Credit Agreement.

Providing that we are not required to meet certain debt and leverage covenants for certain periods extending until March 31, 2016 (previously we were required to meet such covenants beginning with the quarter ended December 31, 2015).

Extending the date we are required to begin making required prepayments under the terms of the Credit Agreement, in an amount equal to 100% of the extent total consolidated debt exceeds (x) total consolidated EBITDA (as calculated pursuant to the agreement) multiplied by (y) the maximum debt leverage ratios described in the Credit Agreement, until March 31, 2016 (previously no payments were required to be made through December 31, 2015).

Reducing certain required consolidated EBITDA targets pursuant to the terms of the Credit Agreement to be more favorable to the Company, including reducing such targets to $250,000, $1.5 million, $4.25 million, $7.25 million and $9.5 million for the quarters ended September 30, 2015, December 31, 2015, March 31, 2016, June 30, 2016 and September 30, 2016 (and each quarter thereafter), respectively, compared to $3 million, $5.5 million, $8 million, $9 million and $10 million, respectively.

Extending the date we are required to begin meeting various leverage ratios and consolidated EBITDA targets as set forth in the Credit Agreement from December 31, 2015 and June 30, 2015, to March 31, 2016 and September 30, 2015, respectively.

As additional consideration for the Lender agreeing to the terms of the Third Amendment, we agreed to modify, pursuant to a First Amendment to Warrant, the terms of the Lender Warrant. Pursuant to the First Amendment to Warrant, we agreed to reduce the exercise price of the Lender Warrant to $2.778 per share (the 30 day volume weighted average price of our common stock as of the date of our entry into the Third Amendment) from $3.395828553 per share, and that in the event we issue any preferred stock, that the lowest exercise price associated with any warrants or similar convertible securities issued in connection with such preferred stock offering shall become the exercise price of the Lender Warrant; provided that, if the Company does not issue preferred stock on or prior to June 30, 2015, then the exercise price of the Lender Warrant would be reduced to the lowest closing price per share of our common stock on any date between March 26, 2015 and June 30, 2015.

Effective June 29, 2015, we repaid $15.1 million of the amount owed to the Lender under the Credit, and as a result, the Lender Warrant and rights thereunder were canceled and terminated.

On May 2, 2014, in connection with the closing of the Omega Refining acquisition, the Company assumed two capital leases totaling $3,154,860. Payments of $2,790,299 were made at closing and the balance was $364,561 at September 30, 2015.

The Company financed insurance premiums through various financial institutions bearing interest rates from 4% to 4.52%. All such premium finance agreements have maturities of less than one year and have a balance of $1,172,147 at September 30, 2015.


F-15



Effective March 27, 2015, the Company, Vertex Operating and all of the Company’s other subsidiaries other than E-Source and Golden State, entered into a Loan and Security Agreement with MidCap Business Credit LLC (“MidCap” and the “MidCap Loan Agreement”). Pursuant to the MidCap Loan Agreement, MidCap agreed to loan us up to the lesser of (i) $7 million; and (ii) 85% of the amount of accounts receivable due to us which meet certain requirements set forth in the MidCap Loan Agreement (“Qualified Accounts”), plus the lesser of (y) $3 million and (z) 50% of the cost or market value, whichever is lower, of our raw material and finished goods which have not yet been sold, subject to the terms and conditions of the MidCap Loan Agreement (“Eligible Inventory”), minus any amount which MidCap may require from time to time in order to over secure amounts owed to MidCap under the MidCap Loan Agreement, as long as no event of default has occurred or is continuing under the terms of the MidCap Loan Agreement. The requirement of MidCap to make loans under the MidCap Loan Agreement is subject to certain standard conditions and requirements.
The MidCap Loan Agreement contains customary representations, warranties, covenants, and events of default for facilities of similar nature and size as the MidCap Loan Agreement, and requirements for the Company to indemnify MidCap for certain losses.
We also entered into a Revolving Note (the “MidCap Note”) to evidence amounts borrowed from MidCap from time to time under the MidCap Loan Agreement. Interest on the MidCap Note accrues at a fluctuating rate equal to the aggregate of: (x) the prime rate then in effect, and (y) 1.75% per annum, or at such other rate mutually agreed on from time to time by the parties, based upon the greater of (i) any balance owing under the MidCap Note at the close of each day; or (ii) a minimum assumed average daily loan balance of $3 million. Interest is payable in arrears, on the first day of each month that amounts are outstanding under the MidCap Note. The balance on the revolving note was $659,893 at September 30, 2015.
On January 7, 2015, E-Source entered into a loan agreement with Texas Citizens Bank to consolidate various smaller debt obligations. The loan Agreement provides a term note in the amount of $2,201,372 that matures on January 7, 2020. Borrowings bear a fixed interest rate of 5.5% per annum and interest will be calculated from the date of each advance until repayment in full or maturity. The loan has 59 scheduled monthly payments of $45,147 which includes principal and interest. The loan is collateralized by all of the assets of E-Source. The balance on the term note was $2,045,500 at September 30, 2015.

The Company's outstanding debt facilities as of September 30, 2015 are summarized as follows:

Creditor
 
Loan Type
 
Origination Date
 
Maturity Date
 
Loan Amount
 
Balance on September 30, 2015
MidCap Business Credit, LLC
 
Revolving Note
 
March, 2015
 
March, 2017
 
$
7,000,000

 
$
659,893

Goldman Sachs USA
 
Term Loan
 
May, 2014
 
May, 2019
 
40,000,000

 
23,200,000

Pacific Western Bank
 
Capital Lease
 
September, 2012
 
August, 2017
 
520,219

 
364,561

Texas Citizens Bank
 
Term Note
 
January, 2015
 
January, 2020
 
2,201,372

 
2,045,500

Various institutions
 
Insurance premiums financed
 
Various
 
< 1 year
 
1,789,481

 
1,172,147

 
 
 
 
 
 
 
 
$
51,511,072

 
$
27,442,101


Future contractual maturities of notes payable are summarized as follows:

Creditor
 
2015
 
2016
 
2017
 
2018
 
2019
 
Thereafter
MidCap Business Credit, LLC
 
$
659,893

 
$

 
$

 
$

 
$

 
$

Goldman Sachs USA
 
800,000

 
3,200,000

 
3,200,000

 
3,200,000

 
12,800,000

 

Pacific Western Bank
 
44,460

 
186,947

 
133,154

 

 

 

Texas Citizens Bank
 
71,394

 
442,600

 
468,225

 
495,013

 
523,333

 
44,935

Various institutions
 
661,968

 
510,179

 

 

 

 

Totals
 
$
2,237,715

 
$
4,339,726

 
$
3,801,379

 
$
3,695,013

 
$
13,323,333

 
$
44,935


NOTE 11. EARNINGS PER SHARE


F-16



Basic earnings per share includes no dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the periods presented. The calculation of basic earnings per share for the nine months ended September 30, 2015 includes the weighted average of common shares outstanding. Diluted earnings per share reflect the potential dilution of securities that could share in the earnings of an entity, such as convertible preferred stock, stock options, warrants or convertible securities. The calculation of diluted earnings per share for the nine months ended September 30, 2015 does not include options to purchase 2,129,924 shares, warrants to purchase 219,868 shares of common stock, Series B Preferred stock which is convertible into 8,032,274 shares of common stock and warrants to purchase 4,032,267 shares due to their anti-dilutive effect.

The following is a reconciliation of the numerator and denominator for basic and diluted earnings per share for the nine months ended September 30, 2015 and 2014

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Basic Earnings per Share
 
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
 
Net income available to common shareholders
 
$
(2,972,571
)
 
$
(1,929,370
)
 
$
(20,384,221
)
 
$
5,933,877

Denominator:
 
 
 
 
 
 

 
 

Weighted-average shares outstanding
 
28,198,701

 
25,151,660

 
28,165,427

 
23,077,914

Basic earnings per share
 
$
(0.11
)
 
$
(0.08
)
 
$
(0.72
)
 
$
0.26

 
 
 
 
 
 
 
 
 
Diluted Earnings per Share
 
 
 
 
 
 

 
 

Numerator:
 
 
 
 
 
 

 
 

Net income available to common shareholders
 
$
(2,972,571
)
 
$
(1,929,370
)
 
$
(20,384,221
)
 
$
5,933,877

Denominator:
 
 
 
 
 
 

 
 

Weighted-average shares outstanding
 
28,198,701

 
25,151,660

 
28,165,427

 
23,077,914

Effect of dilutive securities
 
 
 
 
 
 

 
 

Stock options and warrants
 

 

 

 
1,116,993

Preferred stock
 

 

 

 
630,419

Diluted weighted-average shares outstanding
 
28,198,701

 
25,151,660

 
28,165,427

 
24,825,326

Diluted earnings per share
 
$
(0.11
)
 
$
(0.08
)
 
$
(0.72
)
 
$
0.24

NOTE 12. COMMON STOCK

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 September 30, 2015, there were 28,214,276 common shares issued and outstanding.

Each share of the Company's common stock is entitled to equal dividends and distributions per share with respect to the common stock when, as and if declared by the Company's board of directors. No holders 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 nine months ended September 30, 2015, a total of 17,476 shares of the Company's Series A Preferred Stock were converted into 17,476 shares of our common stock on a one-for-one basis.
On April 5, 2014, the Company issued 56,180 shares of the Company's restricted common stock in connection with the inventory true up stipulated in the Heartland purchase agreement (as described in greater detail in the Quarterly Report on form 10-Q which we filed with the Securities and Exchange Commission on May 19, 2015).

F-17



During the three months ended March 31, 2015, the Company recognized contingently issuable warrants to purchase 1,766,874 shares of our common stock in connection with the amendments to the Credit Agreement with Goldman Sachs Bank USA (see Note 10). Management has determined that the warrants will more likely than not be canceled due to certain repayment provisions on or before June 30, 2015. Due to the down round feature of the warrant, the Company used the Black-Scholes model to value these warrants and have concluded that these are level 3 inputs. Management determined a discount factor on the grant date and on the balance sheet date based on available projections of cash to be used to make the mandatory repayments which resulted in a fair value derivative liability for the warrants of $577,440 at March 31, 2015. Effective June 29, 2015, we repaid $15.1 million of the amount owed to the lender and as a result, the lender warrants and rights were canceled and terminated.
Effective on June 24, 2015, the Compensation Committee of the Board of Directors (the “Committee”) granted Chris Carlson, our Chief Financial Officer, options to purchase 75,000 shares of our common stock with an exercise price of $3.15 per share, with a ten year term, vesting at the rate of 1/4th of such options per year on the first four anniversaries of the grant, under our 2013 Stock Incentive Plan. 

On July 7, 2015, the Board of Directors granted (a) our non-executive directors options to purchase an aggregate of 300,000 shares of common stock at an exercise price of $2.08 per share (60,000 options per non-executive director); and (b) certain of our non-executive officers, options to purchase an aggregate of 150,000 shares of common stock at an exercise price of $2.08 per share (50,000 shares per executive officer), with a ten year term (subject to continued employment/directorship), vesting at the rate of 1/4th of such options per year on the first four anniversaries of the grant, under our 2013 Stock Incentive Plan in consideration for services rendered and to be rendered to the Company. On September 30, 2015, one of the non-executive officers resigned from the Company, terminating the 50,000 options granted to this individual which were unvested.

In August 2015, holders of our Series B Preferred Stock fully converted all 32,260 of the shares of Series B Preferred Stock which it then held into shares of our common stock on a one-for-one basis. The shares of common stock issuable in connection with such conversion were previously registered by us on a Form S-1 Registration Statement. Additionally, the same holder converted an aggregate of approximately $791 in accrued dividends on such converted Series B Preferred Stock shares into 255 shares of common stock ($3.10 per share of common stock), which shares of common stock were also previously registered by us on a Form S-1 Registration Statement.
NOTE 13.  PREFERRED STOCK AND DETACHABLE WARRANTS

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 Convertible Preferred Stock is 5,000,000 (“Series A Preferred”). The total number of designated shares of the Company’s Series B Preferred Stock is 10,000,000. As of September 30, 2015, there were 612,943 shares of Series A Preferred Stock issued and outstanding and 8,032,274 shares of Series B Preferred Stock issued and outstanding.
Series B Preferred Stock

Dividends on our Series B Preferred Stock accrue at an annual rate of 6% of the original issue price of the preferred stock, subject to increase under certain circumstances, and are payable on a quarterly basis. The dividends may be paid in cash or in shares of registered common stock, or some combination thereof, at the Company's discretion. If paid in registered common stock, 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 of the Company’s common stock for the 10 trading days immediately prior to the applicable date of determination.

In determining the earnings per share on common stock, the earnings will be reduced for the preferred stock dividends and the accretion of the discounts on the Series B Preferred Stock related to the issuance costs, warrant value and the beneficial conversion feature.

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 or $25.0 million in aggregate).

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 “Dividend Stock Payment Price”). Notwithstanding the foregoing, in no event may the Company pay dividends in common stock unless the applicable Dividend Stock Payment Price is above $2.91. If the Company is prohibited from paying the dividend in cash (due to contractual

F-18



senior credit agreements or other restrictions) or is unable to pay the dividend in registered common stock, the dividend will be paid in kind in Series B Preferred Stock shares at $3.10 per share.
 
The Series B Preferred Stock include 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 of the Series B Preferred Stock (the "Designation").

The Series B Preferred Stock (including accrued and unpaid dividends) is convertible into shares of the Company’s common stock at the holder’s option at any time after closing at $3.10 per share (initially a one-for-one basis). If the Company’s common stock trades at or above $6.20 per share for a period of 20 consecutive trading days at any time following the earlier of (a) the effective date of a resale registration statement which we are required to file to register the resale of the shares of common stock underlying the Series B Preferred Stock and Warrants pursuant to the Purchase Agreement (described below), (which was declared effective on August 6, 2015) or (b) December 24, 2015, 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.

Voting Rights

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 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.

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 “Beneficial Ownership Limitation”). The Beneficial Ownership Limitation does not apply to forced conversions undertaken by the Company pursuant to the terms of the Designation (summarized above). In addition to the Beneficial Ownership Limitation, certain of the Investors also entered into agreements with us to limit their ability to effect conversions of Series B Preferred Stock (and exercise of Warrants (defined below)), to prohibit them contractually from converting (or exercising) such applicable security if upon such conversion (or exercise) they would beneficially own more than 4.999% of our outstanding common stock.

Unit Offering

On June 24, 2015, we closed the transactions contemplated by the June 19, 2015 Unit Purchase Agreement (the “Purchase Agreement”) we entered into with certain institutional investors (the “Investors”), pursuant to which the Company sold the Investors an aggregate of 8,064,534 units (the “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 “Warrant” and collectively, the “Warrants”). The Units were sold at a price of $3.10 per Unit (the “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 Purchase Agreement was entered into which was $2.91 per share (the “Closing Bid Price”)). The Warrants have an exercise price of $2.92 per share ($0.01 above the Closing Bid Price). Total gross proceeds from the offering of the Units (the “Offering”) was $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 Offering for which they will receive no fee) from the Offering, for an aggregate commission of $1.365 million which was netted against the proceeds.

The number of shares of common stock issuable upon the complete conversion of the Series B Preferred Stock (not including any dividends which, pursuant to the terms of the Series B Preferred Stock may be paid in shares of common stock of the Company) and complete exercise of the Warrants sold in the Offering (i.e., Warrants to purchase an aggregate of 4,032,267 shares of common stock), would total 12,096,801 shares or 43.0% of our issued and outstanding shares of common stock immediately prior to our entry into the Purchase Agreement.

We used the net proceeds from the Offering to repay amounts owed under the Credit Agreement in the amount of $15.1 million.
 

F-19



In addition, under the Purchase Agreement, the Company has agreed to register the shares of common stock issuable upon conversion of the Series B Preferred Stock and upon exercise of the Warrants under the Securities Act of 1933, as amended, for resale by the Investors. The Company has committed to file a registration statement on Form S-1 by the 30th day following the closing of the 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 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 an Investor for the Units affected by the event that are still held by the Investor upon the occurrence of the event, due on the date immediately following the event that caused such failure (or the 30th day following such event if the event relates to the suspension of the registration statement as described in the 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 Purchase Agreement, the Company has agreed to indemnify the 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 Purchase Agreement or the failure of the Company to perform its obligations under the 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 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 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 Warrants (the “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 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 Lock-Up Period, subject to certain exceptions.

The warrants were valued using the dynamic Black Scholes Merton formula pricing model that computes the impact of share dilution upon the exercise of the warrant shares at approximately $7,021,000. The Black-Scholes inputs used were: expected dividend rate of 0%, expected volatility of 70%-100%, risk free interest rate of 1.59%, and expected term of 5.5 years. This valuation resulted in a beneficial conversion feature on the convertible preferred stock of approximately $5,737,810. This amount will be accreted over the term as a deemed dividend. Fees in the amount of $1.4 million relating to the stock placement were netted against proceeds. The warrants are exercisable beginning on December 26, 2015, and expire December 24, 2020.
The following table represents the carrying amount of the Series B Preferred Stock at inception and as of September 30, 2015:

At Inception
 
Amount
Face amount of Series B Preferred
 
$
25,000,000

Less: warrant value
 
7,028,067

Less: beneficial conversion feature
 
5,737,796

Less: issuance costs and fees
 
1,442,462

Carrying amount at inception
 
$
10,791,675

 
 
 
At September 30, 2015
 
Amount
Face amount of Series B Preferred
 
$
25,000,000

Less: un-accreted discount
 
13,808,377

Carrying amount at September 30, 2015
 
$
11,191,623


In accordance with ASC 815-40-25 and ASC 815-10-15 Derivatives and Hedging and ASC 480-10-25 Liabilities-Distinguishing Liabilities from Equity as approved by shareholders, the convertible preferred shares are accounted for net outside of stockholders’ equity at $11,191,623 with the warrants accounted for as liabilities at their fair value of $4,393,034 as

F-20



of September 30, 2015. The value of the derivative warrant liability will be re-measured at each reporting period with changes in fair value recorded as earnings. To derive an estimate of the fair value of these warrants, the Company utilized a dynamic Black Scholes Merton formula that computes the impact of share dilution upon the exercise of the 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. In the event the convertible preferred shares are redeemed, any redemption price in excess of the carrying amount of the convertible preferred stock would be treated as a dividend.
The changes in liabilities measured using significant unobservable inputs for the period ended September 30, 2015 were as follows:
Level Three Roll-Forward
Item
 
Level 3
Balance at December 31, 2014
 
$

Warrants issued June 24, 2015
 
7,028,067

Change in valuation of warrants
 
(2,635,033
)
Balance at September 30, 2015
 
$
4,393,034


The warrants related to the Series B Preferred Stock were revalued at September 30, 2015 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 $4,393,034. The dynamic Black-Scholes inputs used were: expected dividend rate of 0%, expected volatility of 70%-100%, risk free interest rate of 1.10%, and expected term of 4.9 years.
The Certificate of Designation contains customary anti-dilution protection for proportional adjustments (e.g. stock splits).
The beneficial conversion feature (BCF) relates to potential difference between the effective conversion price (measured based on proceeds allocated to the Series B Preferred Stock) and the fair value of the stock into which Preferred B Shares are currently convertible (common stock).
If a conversion option embedded in a debt host instrument does not require separate accounting as a derivative instrument under ASC 815, the convertible hybrid instrument must be evaluated under ASC 470-20 for the identification of a possible (BCF).

The BCF will be initially recognized as an offsetting reduction to Series B Preferred B Stock (debit), with the credit being recognized in equity (additional paid-in capital).
The resulting debt issuance costs, debt discount, value allocated to warrants, and BCF should be accreted to the Series B Preferred Stock to ensure that the Series B Preferred Stock balance is equal to its face value as of the redemption or conversion date, if conversion is expected earlier.
The BCF was determined by calculating the intrinsic value of the conversion feature as follows:
Face amount of Series B Preferred Stock
 
$
25,000,000

Less: allocated value of Warrants
 
7,028,067

Allocated value of Series B Preferred Stock
 
$
17,971,933

Shares of Common stock to be converted
 
8,064,534

Effective conversion price
 
$
2.23

Market price
 
$
2.94

Intrinsic value per share
 
$
0.7115

Intrinsic value of beneficial conversion feature
 
$
5,737,796


F-21



NOTE 14.  SEGMENT REPORTING

The Company’s reportable segments include the Black Oil, Refining & Marketing and Recovery divisions. Segment information for the three and nine months ended September 30, 2015 and 2014 is as follows:

NINE MONTHS ENDED SEPTEMBER 30, 2015
 
 
Black Oil
 
Refining &
Marketing
 
Recovery
 
Total
Revenues
 
$
86,885,254

 
$
28,466,144

 
$
10,715,236

 
$
126,066,634

 
 
 
 
 
 
 
 
 
Income (loss) from operations
 
$
(14,429,753
)
 
$
623,594

 
$
2,180,404

 
$
(11,625,755
)

NINE MONTHS ENDED SEPTEMBER 30, 2014
 
 
Black Oil
 
Refining &
Marketing
 
Recovery
 
Total
Revenues
 
$
124,884,174

 
$
58,000,951

 
$
13,447,671

 
$
196,332,796

 
 
 
 
 
 
 
 
 
Income (loss) from operations
 
$
388,035

 
$
1,768,043

 
$
(1,482,431
)
 
$
673,647


THREE MONTHS ENDED SEPTEMBER 30, 2015
 

Black Oil

Refining &
Marketing

Recovery

Total
Revenues

$
27,632,744


$
8,752,135


$
2,877,705


$
39,262,584














Income (loss) from operations

$
(3,942,438
)

$
(216,654
)

$
1,660,172


$
(2,498,920
)

THREE MONTHS ENDED SEPTEMBER 30, 2014
 
 
Black Oil
 
Refining &
Marketing
 
Recovery
 
Total
Revenues
 
$
52,434,252

 
$
19,655,674

 
$
4,813,590

 
$
76,903,516

 
 
 
 
 
 
 
 
 
Income (loss) from operations
 
$
(749,043
)
 
$
229,260

 
$
(606,902
)
 
$
(1,126,685
)

NOTE 15. CONTINGENT CONSIDERATION

As part of the consideration paid in connection with the acquisition of Vertex Holdings, L.P. in August 2012, if certain earning targets were met, the Company had to pay the seller approximately $2,233,000 annually in 2013, 2014 and 2015. The earn-out targets were not met for 2013 and the earn-out consideration was adjusted accordingly. In 2014, it was determined that the 2014 and 2015 earnings targets would not be met and the contingent consideration was reduced by $2,861,000, which represented 100% of the discounted cash flow for years two and three.

As part of the consideration paid in connection with the acquisition of certain assets from Omega Refining, LLC in May 2014, the Company agreed to pay the seller additional earn-out consideration in the event that certain EBITDA targets were met (a) during any twelve month period during the eighteen month period commencing on the first day of the first full calendar month following the May 2, 2014 initial closing date (which targets begin at $8,000,000 of EBITDA during such twelve month period) of up to 470,498 shares of common stock of the Company; and (b) during the calendar year ended December 31, 2015 (which targets begin at $9,000,000 of EBITDA) of up to 770,498 shares of common stock of the Company, in each case subject to adjustment for certain capital expenditures. In 2014, the contingent consideration was evaluated by management and reduced by $2,165,000, which represents 100% of the contingent liability related to the Omega Refining acquisition.

F-22



As part of the consideration paid in connection with the acquisition of 51% of E-Source, if certain targets were met, the Company had to pay the seller approximately $260,000 annually in 2014, 2015, 2016 and 2017. The Company recorded contingent consideration of $748,000, which was the discounted cash flows of the earn-out payments. Of this amount, $136,662 was paid in 2014 and the remaining $611,338 was written off. The write off was triggered because certain terms of the contingent consideration agreement were not met by the acquiree.
As part of the consideration paid for certain assets acquired from Warren Ohio Holdings Co., LLC. f/k/a Heartland Group Holdings, LLC (“Heartland”) in December 2014, the Company has agreed to pay the seller additional earn-out consideration of up to a maximum of $8,276,792, based on total EBITDA related to the operations acquired from Heartland during the twelve month period beginning on the first day of the first full calendar month commencing on or after the first anniversary of the closing (“Contingent Payments”). Any Contingent Payment due is payable 50% in cash and 50% in shares of the Company’s common stock. We are required to furnish Heartland, at such time as the financial results for each applicable earn-out period are finalized and released, but no later than one hundred twenty days following the earn-out period, a written statement of the Contingent Payment due, if any. In the event a Contingent Payment is due, it is required to be satisfied within five business days, after the final determination of the amount of the Contingent Payment. Additionally, the amount of any Contingent Payment is reduced by two-thirds of the cumulative total of required capital expenditures incurred at Heartland’s refining facility in Columbus, Ohio, which are paid or funded by Vertex OH after the closing, not to exceed $866,667, which capital expenditures are estimated to total $1.3 million in aggregate. The Company recorded contingent consideration of $6,069,000, which represents the fair value of the earn-out payment calculated at close. As of September 30, 2015, the contingent consideration was evaluated by management and it was determined that no adjustment was necessary.

NOTE 16. SUBSEQUENT EVENTS

For the period from June 24-30, 2015 and June 30-September 30, 2015, a total of approximately $398,459 of dividends accrued on our outstanding Series B Preferred Stock (not including shares of Series B Preferred Stock converted into common stock in August 2015, as described above). We were prohibited from paying such dividends in shares of common stock because the applicable Dividend Stock Payment Price was below $2.91. The “Dividend Stock Payment Price” is calculated by dividing (a) the accrued dividends by (b) 90% of the arithmetic average of the volume weighted average price (VWAP) of the Company’s common stock for the 10 trading days immediately prior to the applicable date of determination. In the event the applicable Dividend Stock Payment Price is below $2.91 we are required to pay such dividend in cash or in-kind in additional shares of Series B Preferred Stock. Pursuant to the terms of the Credit Agreement with the Lender, we are prohibited from paying the dividend in cash and therefore we paid the accrued dividends in-kind by way of the issuance of 128,535 restricted shares of Series B Preferred Stock pro rata to each of the then holders of our Series B Preferred Stock in October 2015.

On November 9, 2015, we, Vertex Operating, and certain of our subsidiaries, Lender, as lender and Agent, as administrative agent, entered into a Fourth Amendment to Credit and Guaranty Agreement, amending the Credit Agreement (defined and described above under Note 10 (the “Fourth Amendment”). The amendments to the Credit Agreement effected by the Fourth Amendment include, but are not limited to:

Including Vertex OH in the calculation of Consolidated Adjusted EBITDA, once Vertex OH has (a) delivered certain required mortgages and legal opinions in respect to its real estate properties and in order to create a valid first priority security interest in such real estate properties in favor of the Agent, (b) taken action to cause certain deposit accounts of Vertex OH to become controlled accounts under the Credit Agreement; and (c) appointed an agent for service of process in New York.
 
Excluding from the definition of Consolidated Liquidity any amounts which are more than 75 days past due.

Changing the beginning calculation dates for certain fixed charge ratios required to be calculated pursuant to the terms of the Credit Agreement from December 31, 2015 to March 31, 2016.

Changing the way certain required leverage ratios are calculated as provided in the Credit Agreement.

Extending the date that we were required to begin making installment payments on the Credit Agreement from September 30, 2015 to the earlier of (a) December 31, 2015; and (b) the date we receive insurance proceeds from the Bango, Nevada plant of at least $800,000.

Removing prior restrictions which prevented Vertex OH from undertaking certain actions including co-mingling funds with the Company’s other subsidiaries and which required such entity to maintain its own books and records.

F-23




Extending the date we are required to begin meeting various leverage ratios relating to indebtedness, fixed charge ratios and consolidated EBITDA targets (while also reducing such consolidated EBITDA targets) from December 31, 2015 to March 31, 2016, and in some cases modifying the calculation of such ratios.

Reducing minimum consolidated liquidity amounts to not less than (i) $500,000 at any time from the date of the Fourth Amendment to December 31, 2015, (ii) $750,000 at any time after December 31, 2015 and on or prior to March 31, 2016, and (iii) $1,000,000 at any time after March 31, 2016.

Additionally, the Agent and the Company agreed that if the Company prepays, for any reason, all or any part of the principal balance of the amount owed under the Credit Agreement on or prior to June 18, 2018, the Company would pay the Agent a prepayment premium (“Prepayment Premium”) equal to (i) the greater of (a) 4.00% of such prepayment and (b) the Yield Maintenance Premium (defined below) with respect to such prepayment, if such repayment occurs on or prior to June 18, 2017, (ii) 2.00% of such repayment if such repayment occurs after June 18, 2017 and on or prior to June 18, 2018, and (iii) nothing thereafter; provided, however, that no Prepayment Premium is due with respect to any mandatory prepayment from (1) insurance proceeds received pursuant to the terms of the Credit Agreement, (2) excess cash flow under the terms of the Credit Agreement, (3) amounts required to be paid under the Credit Agreement in the event, among other things, certain EBITDA targets and leverage ratios are not met, (4) certain other mandatory prepayments of the amounts owed under the Credit Agreement; (5) tax return payments under the Credit Agreement, or voluntary prepayments of the amounts owed under the Credit Agreement prior to January 31, 2016. “Yield Maintenance Premium” means an amount equal to (1) the aggregate amount of interest which would have otherwise been payable on the amount of the principal prepayment from the date of prepayment until June 18, 2017, minus (2) the aggregate amount of interest the holder of the debt would earn if the prepaid principal amount were reinvested for the period from the date of prepayment until June 18, 2017 in treasury securities. Finally, the Agent agreed to Vertex OH becoming a party to the Midcap Loan Agreement and to guaranteeing certain debt owed to Midcap thereunder.

Also on November 9, 2015, we and certain of our subsidiaries entered into a First Amendment to Loan and Security Agreement (the “Midcap First Amendment”), which amended the Midcap Loan Agreement with Midcap. The Midcap First Amendment amended the Midcap Loan Agreement to add Vertex OH as a party thereto; remove Vertex OH’s requirement to enter into a negative pledge agreement with MidCap; created separate maximum borrowing base credit limits for Vertex OH’s accounts and customers ($100,000 maximum per customer, subject to certain exceptions); excluded customers who are based outside of the U.S. or Canada from the credit limits if backed by a bank letter of credit or covered by a foreign receivables insurance policy; removed inventory of Vertex OH from the definition of Eligible Inventory under the Midcap Loan Agreement; and provided that additional affiliates of the Company may become party to the Midcap Loan Agreement by executing an assumption agreement and revolving note in favor of Midcap.


F-24



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

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

This Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. In some cases, you can identify forward-looking statements by the following words: “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “ongoing,” “plan,” “potential,” “predict,” “project,” “should,” or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. Forward-looking statements are not a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time the statements are made and involve known and unknown risks, uncertainties and other factors that may cause our results, levels of activity, performance or achievements to be materially different from the information expressed or implied by the forward-looking statements in this Report. These factors include:

risks associated with our outstanding credit facilities, including amounts owed, restrictive covenants, security interests thereon and our ability to repay such facilities and amounts due thereon when due;
the level of competition in our industry and our ability to compete;
our ability to respond to changes in our industry;
the loss of key personnel or failure to attract, integrate and retain additional personnel;
our ability to protect our intellectual property and not infringe on others’ intellectual property;
our ability to scale our business;
our ability to maintain supplier relationships and obtain adequate supplies of feedstocks;
our ability to obtain and retain customers;
our ability to produce our products at competitive rates;
material weaknesses in our internal controls over financial reporting;
our ability to execute our business strategy in a very competitive environment;
trends in, and the market for, the price of oil and gas and alternative energy sources;
our ability to maintain our relationship with KMTEX;
the impact of competitive services and products;
our ability to integrate acquisitions;
our ability to complete future acquisitions;
our ability to maintain insurance;
potential future litigation, judgments and settlements;
rules and regulations making our operations more costly or restrictive;
changes in environmental and other laws and regulations and risks associated with such laws and regulations;
economic downturns both in the United States and globally;
risk of increased regulation of our operations and products;
negative publicity and public opposition to our operations;
disruptions in the infrastructure that we and our partners rely on;
an inability to identify attractive acquisition opportunities and successfully negotiate acquisition terms;
our ability to effectively integrate acquired assets, companies, employees or businesses;
liabilities associated with acquired companies, assets or businesses;
interruptions at our facilities;
required earn-out payments and other contingent payments we are required to make;
unexpected changes in our anticipated capital expenditures resulting from unforeseen required maintenance, repairs, or upgrades;

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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” below and in our Annual Report on Form 10-K and prior Form 10-Qs.

You should read the matters described in “Risk Factors” below and disclosed in the Company’s Annual Report on Form 10-K/A, filed with the Commission on April 15, 2015 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 hereto as Exhibit 99.1, for a list of abbreviations and definitions used throughout this Report.

Certain capitalized terms used below and otherwise defined below, have the meanings given to such terms in the footnotes to our consolidated financial statements included above under “Part I - Financial Information” - “Item 1. Financial Statements”.

In this Quarterly Report on Form 10-Q, we may rely on and refer to information regarding the refining, re-refining, used oil and oil and gas industries in general from market research reports, analyst reports and other publicly available information.  Although we believe that this information is reliable, we cannot guarantee the accuracy and completeness of this information, and we have not independently verified any of it.

Corporate History of the Registrant:

Vertex Energy, Inc. (the “Company,” “we,” “us,” and “Vertex”) was formed as a Nevada corporation on May 14, 2008.  Pursuant to an Amended and Restated Agreement and Plan of Merger dated May 19, 2008, by and between Vertex Holdings, L.P. (formerly Vertex Energy, L.P.), a Texas limited partnership ("Holdings"), us, World Waste Technologies, Inc., a California corporation (“WWT” or “World Waste”), Vertex Merger Sub, LLC, a California limited liability company and our wholly-owned subsidiary ("Merger Subsidiary"), and Benjamin P. Cowart, our Chief Executive Officer, as agent for our shareholders (as amended from time to time, the “Merger Agreement”). Effective on April 16, 2009, World Waste merged with and into Merger Subsidiary, with Merger Subsidiary continuing as the surviving corporation and becoming our wholly-owned subsidiary (the "Merger"). In connection with the Merger, (i) each outstanding share of World Waste common stock was cancelled and exchanged for 0.10 shares of our common stock; (ii) each outstanding share of World Waste Series A preferred stock was cancelled and exchanged for 0.4062 shares of our Series A preferred stock; and (iii) each outstanding share of World Waste Series B preferred stock was cancelled and exchanged for 11.651 shares of our Series A preferred stock. Additionally, as a result of the Merger, the common stock of World Waste was effectively reversed one for ten (10) as a result of the exchange ratios set forth in the Merger, and unless otherwise noted, the impact of such effective reverse stock split, created by the exchange ratio set forth above, is retroactively reflected throughout this Report.

Recent Acquisition

Aaron Oil Acquisition

Effective August 6, 2015, H&H Oil, L.P. , our indirect wholly-owned subsidiary (“H&H Oil”)
acquired a collection route consisting of collecting, shipping and selling used oil, oil filters, antifreeze and other related services in the state of Louisiana, but excluding industrial customers, maritime customers, off shore customers, dockside locations, industrial services, used absorbent services, wastewater generating customers and collectors/transporters of crankcase used oil, petroleum fuel reclamation customers and crude oil producers/processing/recovery/reclamation customers of Aaron Oil Company, Inc. (“Aaron Oil”). Included in the purchase were certain trucks and other assets owned by Aaron Oil and certain contract rights. The President, Chief Executive Officer and owner of Aaron Oil is Dan Cowart, the brother of our Chief Executive Officer and largest stockholder, Benjamin P. Cowart. The acquisition price paid at closing was approximately $1 million, which included a reimbursement for certain prepaid contract rights. Aaron Oil also agreed to provide account servicing services to us for a period

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of sixty days following the closing at an agreed upon price per gallon of oil serviced. Aaron Oil also agreed to a non-compete provision prohibiting Aaron Oil from competing against the Company in the Louisiana market for a period of two years from the closing.

Recent Events:

Churchill County, Nevada Lease

On April 30, 2015, Vertex Refining NV, LLC ("Vertex Refining Nevada"), entered into a Lease With Option For Membership Interest Purchase (the “Bango Lease”) with Bango Oil, LLC (“Bango Oil”). Pursuant to the Bango Lease, we, through Vertex Refining Nevada, agreed to lease a used oil re-refining plant located on approximately 40 acres in Churchill County, Nevada (the “Bango Plant”). The Bango Plant produces base lubricating oils and all of the raw and finish products into and out of the Bango Plant are transported by either rail car or tanker trucks.

The Bango Plant was previously leased by Bango Refining, a subsidiary of Omega Holdings; however, the lease was terminated by Bango Oil and we were able to enter into the Bango Lease directly with Bango Oil instead of having to acquire the rights to the Bango Plant pursuant to the prior terms of our prior Asset Purchase Agreement with Louisiana LV OR LLC f/k/a 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"), pursuant to which we were originally required to deliver 1.5 million shares to Omega and to forgive amounts due under the Omega Secured Note (defined and described below under "Liquidity and Capital Resources - "Omega Secured Note"). Bango Refining ceased operating the Bango Plant on April 30, 2015. As a result of its lease with Bango Oil, Vertex Refining Nevada has the right as of May 1, 2015 to operate the Bango Plant and is in the process of obtaining required operating permits.

The Bango Lease contains usual and customary covenants, representations, events of default and indemnification requirements for a commercial lease agreement of similar size and scope as the Bango Lease. The term of the Bango Lease continues until August 10, 2025, provided that as long as no event of default under the Bango Lease exists, we have the right to terminate the Bango Lease at any time, beginning six months after the start of the lease with twelve months prior notice to Bango Oil, provided further that Bango Oil can terminate the Bango Lease with thirty days prior notice to us during the twelve month notice period (i.e., after we have previously provided the twelve month notice of our intent to terminate the Bango Lease). Notwithstanding the above, we also have the right, during the first six months of the lease, to terminate the Bango Lease with five days written notice to Bango Oil in the event certain material improvements or equipment at the Bango Plant are physically removed by creditors of Omega, or such creditors obtain a preliminary injunction preventing the use of a material portion of such improvements or equipment, and in either case it interferes with our use of the plant.

No rent is due under the Bango Lease until January 1, 2016, at which time rent in the amount of $244,000 per month is due for the remainder of the term of the lease. We also have the option of paying rent which is due during 2016 in shares of our restricted common stock. Specifically, we have the right to issue shares of restricted common stock to Bango Oil equal to 110% of the rental payment due, based on the volume weighted average price (VWAP) of our common stock during the ten day period preceding the first of each applicable month, provided that if on the six month anniversary of the issuance of any stock issued in consideration for rent due, the value of the stock issued is less than 110% of the rental payment due, we are required to pay Bango Oil the difference in cash or issue Bango Oil additional shares of common stock equal to the difference in value. In addition to monthly rent, we are required to pay all taxes assessed on the property under the Bango Lease.

The Bango Lease also includes a purchase option, whereby, if no event of default exists on the Bango Lease, we have the option at any time during the term of the lease to purchase all of the equity interests of Bango Oil (the “Purchase Option”), effectively acquiring ownership of the Bango Plant. The initial consideration due to Bango Oil in connection with the Purchase Option is $8.5 million, provided that if the Purchase Option is not exercised by us prior to August 31, 2015, the amount due increases by $125,000 per month until July 1, 2016, and $3,000 per month thereafter, up to a maximum of $13 million, assuming we make timely rental payments under the lease (in the event we fail to timely make any rental payment due, the monthly increase in the purchase price for such applicable month increases by an additional $122,000).
 
We also continue to maintain a first priority security interest in certain personal property of Omega used at the plant pursuant to our prior agreements with Omega (which property we lease pursuant to the Personal Property Lease described below). In the event we obtain title to such property which secures the repayment of the Omega Secured Note through a foreclosure, we agreed to transfer certain assets which constitute fixtures to Bango Oil upon the termination of the Bango Lease, unless such termination is due to us exercising our rights under the Purchase Option. Notwithstanding the above, Vertex Refining Nevada entered into a Personal Property Lease with Omega Refining and Bango Refining, both related parties of Omega on April 30, 2015 (the “Personal Property Lease”), whereby Vertex Refining Nevada agreed to lease all machinery, equipment and other tangible personal property

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located at the Bango Plant from Omega Refining and Bango Refining, for $220,000 per month, provided that until the Omega Secured Note is paid in full, Vertex Refining Nevada is able to accrue such payments and set them off against the amount due under the Omega Secured Note. The Personal Property Lease terminates after 60 days unless Vertex Refining Nevada provides notice of its intent to renew for an additional 30 days. It is anticipated that Vertex Refining Nevada will acquire the leased personal property from Omega Refining and Bango Refining at the termination of the Personal Property Lease pursuant to Article 9 of the Uniform Commercial Code, with such acquisition occurring through an offset of a portion of the amount due Vertex Refining under the Omega Secured Note.

Also on April 30, 2015, Vertex Refining Nevada and Vertex Operating, LLC ("Vertex Operating"), our wholly-owned subsidiary, entered into a Shared Services Agreement whereby Vertex Operating agreed to operate and provide support services at the Bango Plant for $80,000 per month through May 2, 2019.

In addition to the Bango Lease for the Bango Plant, Vertex Refining Nevada also entered into two Lease and Purchase Agreements (the “Equipment Leases”). The Equipment Leases provide the use of a rail facility and related equipment and a pre-fabricated metal building located at the plant. The Equipment Leases expire on December 31, 2016, subject to certain rights Vertex Refining Nevada has to terminate the leases earlier. The monthly rental costs for the leases are $16,300 and $3,800 per month, respectively, provided no rent is due for fiscal 2015. We also have the right pursuant to the Equipment Leases to pay the rent due under the Equipment Leases in shares of our restricted common stock, equal in value to 110% of the applicable rental payment due, based on the VWAP of our common stock during the ten day period preceding the first of each applicable month, provided that if on the six month anniversary of the issuance of any stock in lieu of cash payments, the value of the stock issued (based on the then 10 day VWAP) is less than 110% of the rental payment due, we are required to pay the lessor(s) the difference in cash or issue the lessor(s) additional shares of common stock equal to the difference in value. We also have the right under the Equipment Leases to acquire the applicable property/equipment subject to each Equipment Lease at any time prior to the expiration of the leases for $914,000 and $400,000, respectively, provided such amounts are discounted to $776,900 and $340,000, respectively, if the applicable purchase option is exercised prior to August 31, 2015. Finally, we have the right pursuant to the agreements to pay the purchase price associated with the purchase option in restricted common stock, equal in value to 110% of the amount due, based on the VWAP of our common stock during the ten day period preceding the purchase date, provided that if on the six month anniversary of the issuance of any stock in lieu of a cash payment, the value of the stock issued (based on the then 10 day VWAP) is less than 110% of the purchase price, we are required to pay the lessor(s) the difference in cash or issue the lessor(s) additional shares of common stock equal to the difference in value.

Our senior lender, Goldman Sachs Bank USA (“Goldman”), approved the entry by Vertex Refining Nevada into the Bango Lease and Equipment Leases, and also waived various events of default which had previously occurred under our senior credit facility with Goldman relating to various deliverables which we failed to make to Goldman as required pursuant to the terms of the credit facility and the fact that our auditor provided a ‘going concern’ opinion in our December 31, 2014 audited financial statements.

Each of the lessors under the Bango Lease and Equipment Leases also entered into an Acknowledgement and Confirmation Agreement with us, whereby they make various representations regarding their financial suitability to receive shares of our common stock, the restricted nature of the shares they may receive in lieu of cash consideration under the leases, and their status as an accredited investor, and agreed to not sell our stock short during the term of the leases which they are party to, and we agreed to not issue such investors securities representing more than 9.99% of our outstanding common stock. All of the parties also agreed that the aggregate shares of common stock issuable pursuant to all of the leases would not (i) exceed 19.9% of the outstanding shares of our common stock on April 30, 2015, (ii) exceed 19.9% of the combined voting power of the then outstanding voting securities of our common stock on April 30, 2015, or (iii) otherwise exceed such number of shares of common stock that would violate applicable listing rules of the NASDAQ Stock Market in the event our stockholders do not approve the issuance of the shares (collectively, the “Share Cap”).

Unit Offering

On June 24, 2015, we closed the transactions contemplated by the June 19, 2015 Unit Purchase Agreement (the “Purchase Agreement”) we entered into with certain institutional investors (the “Investors”), pursuant to which the Company sold the Investors an aggregate of 8,064,534 units (the “Units”), each consisting of (i) one share of Series B Preferred Stock (described below) and (ii) one warrant to purchase one-half of a share of common stock of the Company (each a “Warrant” and collectively, the “Warrants”). The Units were sold at a price of $3.10 per Unit (the “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 Purchase Agreement was entered into which was $2.91 per share (the “Closing Bid Price”)). The Warrants have an exercise price of $2.92 per share ($0.01 above the Closing Bid Price). Total gross proceeds from the offering of the Units (the “Offering”) were $25.0 million.


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Craig-Hallum Capital Group LLC (the “Placement Agent”) acted as exclusive placement agent in connection with the Offering. The Placement Agent received a commission equal to 6.5% of the gross proceeds (less $4.0 million raised from certain investors in the Offering for which they will receive no fee) from the Offering, for an aggregate commission of $1.365 million.

The number of shares of common stock issuable upon the complete conversion of the Series B Preferred Stock (not including any dividends which, pursuant to the terms of the Series B Preferred Stock may be paid in shares of common stock of the Company) sold at closing and complete exercise of the Warrants sold in the Offering (i.e., Warrants to purchase an aggregate of 4,032,267 shares of common stock), would total 12,096,801 shares or 43.0% of our issued and outstanding shares of common stock immediately prior to our entry into the Purchase Agreement.

We used the net proceeds from the Offering to repay amounts owed under our senior credit facility with Goldman in the amount of $15.1 million and plan to use the remaining proceeds for general corporate and working capital purposes. Pursuant to the terms of the Common Stock Purchase Warrant dated March 26, 2015 (as amended and modified to date the “Lender Warrant”) which we previously granted to Goldman, Sachs & Co., an affiliate of Goldman (the “Holder”), which provided the Holder the right to purchase up to 1,766,874 shares of our common stock (as described in greater detail in the Current Reports on Form 8-K which we filed with the Securities and Exchange Commission on March 31, 2015 and June 19, 2015), such Lender Warrant and rights thereunder were cancelled and terminated in connection with our payment of the $15.1 million to Goldman as described above.
 
In addition, under the Purchase Agreement, the Company has agreed to register the shares of common stock issuable upon conversion of the Series B Preferred Stock and upon exercise of the Warrants under the Securities Act of 1933, as amended, for resale by the Investors. The Company has committed to file a registration statement on Form S-1 by the 30th day following the closing of the Offering 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), each of which filing and effectiveness deadlines were met by the Company, and which registration statement was declared effective by the Securities and Exchange Commission on August 6, 2015. The 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 an Investor for the Units affected by the event that are still held by the Investor upon the occurrence of the event, due on the date immediately following the event that caused such failure (or the 30th day following such event if the event relates to the suspension of the registration statement as described in the 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 Purchase Agreement, the Company has agreed to indemnify the 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 Purchase Agreement or the failure of the Company to perform its obligations under the 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 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 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 Warrants (the “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 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 Lock-Up Period, subject to certain exceptions.

Series B Preferred Stock

On June 23, 2015, we filed with the Secretary of State of Nevada, an Amended and Restated Certificate of Designation of Vertex Energy, Inc. Establishing the Designation, Preferences, Limitations and Relative Rights of Its Series B Preferred Stock (the “Designation” and the “Series B Preferred Stock”), which Designation filing became effective on the same date.

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).


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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 “Dividend Stock Payment Price”). Notwithstanding the foregoing, in no event may the Company pay dividends in common stock unless the applicable Dividend Stock Payment Price is above $2.91. If the Company is prohibited from paying the dividend in cash (due to contractual senior credit agreements or other restrictions) or is unable to pay the dividend in registered common stock, the dividend will be paid in kind in 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.

The Series B Preferred Stock (including accrued and unpaid dividends) is convertible into shares of the Company’s common stock at the holder’s option at any time after closing at $3.10 per share (initially a one-for-one basis). If the Company’s common stock trades at or above $6.20 per share for a period of 20 consecutive trading days at any time following the earlier of (a) the effective date of a resale registration statement which we are required to file to register the resale of the shares of common stock underlying the Series B Preferred Stock and Warrants pursuant to the Purchase Agreement (described above), or (b) December 24, 2015, 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 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.

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 “Beneficial Ownership Limitation”). The Beneficial Ownership Limitation does not apply to forced conversions undertaken by the Company pursuant to the terms of the Designation (summarized above). In addition to the Beneficial Ownership Limitation, certain of the Investors also entered into agreements with us to limit their ability to effect conversions of Series B Preferred Stock (and exercise of Warrants (defined above)), to prohibit them contractually from converting (or exercising) such applicable security if upon such conversion (or exercise) they would beneficially own more than 4.999% of our outstanding common stock.

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, refinement, and sales of aggregated feedstock and re-refined products to end users. We operate in three divisions- the Black Oil, Refining and Marketing and Recovery divisions. Our Black Oil division collects and purchases used motor oil directly from third-party generators, aggregates used motor oil from an established network of local and regional collectors, and sells used motor oil to our customers for use as a feedstock or replacement fuel for industrial burners. Our Refining and Marketing division aggregates and manages the re-refinement of used motor oil and other petroleum by-products and sells the re-refined products to end customers. Our Recovery division is a generator solutions company for the proper recovery and management of hydrocarbon streams. We operate a refining facility that uses our proprietary Thermal Chemical Extraction Process ("TCEP") technology and we also utilize third-party processing facilities.

We previously acquired a 100% interest in E-Source Holdings, LLC ("E-Source") , a company that leases and operates a facility located in Houston, Texas, and provides dismantling, demolition, decommission and marine salvage services at industrial facilities throughout the Gulf Coast. E-Source also owns and operates a fleet of trucks and other vehicles used for shipping and handling equipment and scrap materials. We also recently acquired Omega's Marrero, Louisiana re-refinery and Myrtle Grove complex in Belle Chasse, Louisiana and ownership of Golden State Lubricant Works, LLC ("Golden State") . The Marrero, Louisiana facility re-refines used motor oil and also produces vacuum gas oil. Golden State operates a strategic blending and storage facility located

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in Bakersfield, California. We also recently closed a lease in Churchill County, Nevada which has a used oil re-refining plant located on approximately 40 acres in Churchill County, Nevada, the Bango Plant produces base lubricating oils.
 
Black Oil Division
 
Our Black Oil division is engaged in operations across the entire used motor oil recycling value chain including collection, aggregation, transportation, storage, refinement, and sales of aggregated feedstock and re-refined products to end users. We collect 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 18 collection vehicles, which routinely visit generators to collect and purchase used motor oil. We also aggregate used oil from a diverse network of approximately 50 suppliers who operate similar collection businesses to ours.

We manage the logistics of transport, storage and delivery of used oil to our customers. We own a fleet of 15 transportation trucks and more than 95 aboveground storage tanks with over 5.5 million gallons of storage capacity. These assets are used by both the Black Oil division and the Refining and Marketing division. In addition, we also utilize third parties for the transportation and storage of used oil feedstocks. Typically, we sell used oil to our customers in bulk to ensure efficient delivery by truck, rail, or barge. In many cases, we have contractual purchase and sale agreements with our suppliers and customers, respectively. We believe these contracts are beneficial to all parties involved because it ensures that a minimum volume is purchased from collectors and generators, a minimum volume is sold to our customers, and we are able to minimize our inventory risk by a spread between the costs to acquire used oil and the revenues received from the sale and delivery of used oil. We also use our proprietary TCEP technology to re-refine used oil into marine fuel cutterstock and a higher-value feedstock for further processing. In addition, at our Marrero facility we produce a Vacuum Gas Oil (VGO) product that is sold to refineries as well as to the marine fuels market. At our Columbus, Ohio facility (Heartland Petroleum) we produce a base oil product that is sold to lubricant packagers and distributors.
 
Refining and Marketing Division
 
Our Refining and Marketing division is engaged in the aggregation of feedstock, re-refining it into higher value end products, and selling these products to our customers, as well as related transportation and storage activities. We aggregate a diverse mix of feedstocks including used motor oil, petroleum distillates, transmix and other off-specification chemical products. These feedstock streams are purchased from pipeline operators, refineries, chemical processing facilities and third-party providers, and are also transferred from our Black Oil division. We have a toll-based processing agreement in place with KMTEX LLC (previously KMTEX Ltd., "KMTEX" ) to re-refine feedstock streams, under our direction, into various end products that we specify. KMTEX uses industry standard processing technologies to re-refine our feedstocks into pygas, gasoline blendstock and marine fuel cutterstock. We sell all of our re-refined products directly to end-customers or to processing facilities for further refinement.

Recovery Division

The Recovery division is a generator solutions company for the proper recovery and management of hydrocarbon streams. The Recovery division also provides industrial dismantling, demolition, decommissioning, investment recovery and marine salvage services in industrial facilities. The Company (through this division) owns and operates a fleet of eight trucks and heavy equipment used for processing, shipping and handling of reusable process equipment and other scrap commodities.

We currently provide our services in 13 states, primarily in the Gulf Coast and Central Midwest regions of the United States. For the rolling twelve month period ending September 30, 2015, we aggregated approximately 133.1 million gallons of used motor oil and other petroleum by-product feedstocks and managed the re-refining of approximately 82.2 million gallons of used motor oil with our proprietary TCEP process, VGO and base oil processes.

Biomass Renewable Energy

We are also continuing to work on joint development commercial projects which focus on the separation of municipal solid waste into feedstocks for energy production. We are very selective in choosing opportunities that we believe will result in value for our shareholders. We can provide no assurance that the ongoing venture will successfully bring any projects to a point of financing or successful construction and operation.


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Thermal Chemical Extraction Process

We own the intellectual property for our patented TCEP technology. TCEP is a technology which utilizes thermal and chemical dynamics to extract impurities from used oil which increases the value of the feedstock. We currently sell the TCEP final product as fuel oil cutterstock. We intend to continue to develop the 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 to $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.

Strategy and Plan of Operations

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, funding permitting. The acquisitions and/or partnerships could increase our revenue and provide better control over the quality and quantity of feedstock available for resale and/or upgrading as well as providing additional locations for the implementation of TCEP. We also intend to diversify our revenue by acquiring complementary recycling service businesses, refining assets and technologies, and other vertically integrated businesses or assets. We believe we can realize synergies on acquisitions by leveraging our customer and vendor relationships, infrastructure, and personnel, and by eliminating duplicative overhead costs.

Expand Feedstock Supply Volume

We intend to expand our feedstock supply volume by growing our collection and aggregation operations. We plan to increase the volume of feedstock we collect directly by developing new relationships with generators and working to displace incumbent collectors; increasing the number of collection personnel, vehicles, equipment, and geographical areas we serve; and acquiring collectors in new or existing territories. We intend to increase the volume of feedstock we aggregate from third-party collectors by expanding our existing relationships and developing new vendor relationships. We believe that our ability to acquire large feedstock volumes will help to cultivate new vendor relationships because collectors often prefer to work with a single, reliable customer rather than manage multiple relationships and the uncertainty of excess inventory.

Broaden Existing Customer Relationships and Secure New Large Accounts

We intend to broaden our existing customer relationships by increasing sales of used motor oil and re-refined products to these accounts. In some cases, we may also seek to serve as our customers’ primary or exclusive supplier. We also believe that as we increase our supply of feedstock and re-refined products we will have the opportunity to secure larger customer accounts that require a partner who can consistently deliver high volumes.
 
Re-Refine Higher Value End Products

We intend to develop, lease, or acquire technologies to re-refine our feedstock supply into higher value end products, including assets or technologies which complement TCEP. Currently, we are using TCEP to re-refine used oil feedstock into cutter stock for use in the marine fuel market. We believe that continued improvements to our TCEP technology and investments in additional technologies will enable us to upgrade feedstock into higher value end products, such as fuels and lubricating base oil, which command higher market prices than the current re-refined products we produce. In addition to TCEP, at our Marrero, Louisiana facility we are producing a vacuum gas oil (VGO) through our re-refinery.


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Expand TCEP Re-Refining Capacity

We intend to expand our TCEP capacity by building additional TCEP facilities to re-refine feedstock. We believe the TCEP technology has a distinct competitive advantage over conventional re-refining technology because it produces a high-quality fuel oil product, and the capital expenditures required to build a TCEP plant are significantly lower than a comparable conventional re-refining facility. By continuing the transition from our historical role as a value-added logistics provider to operating as a re-refiner, we believe we will be able to leverage our feedstock supply network and aggregation capabilities to upgrade a larger percentage of our feedstock inventory into higher value end products, which we believe should lead to increased revenue and gross margins. We intend to build TCEP facilities near the geographic location of substantial feedstock sources that we have relationships with through our existing operations or from an acquisition. By establishing TCEP facilities near proven feedstock sources, we will seek to lower our transportation costs and lower the risk of operating plants at low capacity.

RESULTS OF OPERATIONS

Description of Material Financial Line Items:

Revenues
 
We generate revenues from three existing operating divisions as follows:
 
BLACK OIL - Revenues for our Black Oil division are comprised primarily of product sales from our re-refineries and also 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 utility fuel export market. In addition, through used oil re-refining, we re-refine used oil into different commodity products. The Houston, Texas TCEP facility finished product is then sold by barge as a fuel oil cutterstock. Through the operations at our Marrero, Louisiana facility, we produce a Vacuum Gas Oil (VGO) product from used oil re-refining which is then sold via barge to crude refineries to be utilized as an intermediate feedstock in the refining process. The Marrero facility’s product is also sold as a low sulfur fuel oil blend in the marine fuel markets. Through the operations at our Columbus, Ohio facility we produce a base oil finished product which is then sold via truck or rail car to end users for blending, packaging and marketing of lubricants.
 
REFINING AND MARKETING - The Refining and Marketing division generates revenues relating to the sales of finished products.  The Refining and Marketing division gathers hydrocarbon streams in the form of petroleum distillates, transmix and other chemical products that have become off-specification during the transportation or refining process. These feedstock streams are purchased from pipeline operators, refineries, chemical processing facilities and third-party providers, and then processed at a third-party facility under our direction. The end products are typically three distillate petroleum streams (gasoline blendstock, pygas and fuel oil cutterstock), which are sold to major oil companies or to large petroleum trading and blending companies. The end products are delivered by barge and truck to customers.  

RECOVERY - The Recovery division is a generator solutions company for the proper recovery and management of hydrocarbon streams. This division also provides dismantling, demolition, decommission and marine salvage services at industrial facilities. We own and operate a fleet of trucks and other vehicles used for shipping and handling equipment and scrap materials.
 
Our revenues are affected by changes in various commodity prices including crude oil, natural gas, #6 oil and metals.
 
Cost of Revenues
 
BLACK OIL - Cost of revenues for our Black Oil division are comprised primarily of feedstock purchases from a network of providers. Other cost of revenues include processing costs, transportation costs, purchasing and receiving costs, analytical assessments, brokerage fees and commissions, and surveying and storage costs.
 
REFINING AND MARKETING - The Refining and Marketing division incurs cost of revenues relating to the purchase of feedstock, purchasing and receiving costs, and inspection and processing of the feedstock into gasoline blendstock, pygas and fuel oil cutter by a third party. Cost of revenues also includes broker’s fees, inspection and transportation costs.
 
RECOVERY - The Recovery division incurs cost of revenues relating to the purchase of hydrocarbon products, purchasing and receiving costs, inspection, demolition and transporting of metals and other salvage and materials. Cost of revenues also includes broker’s fees, inspection and transportation costs.
 

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Our cost of revenues are affected by changes in various commodity indices, including crude oil, natural gas, #6 oil and metals. For example, if the price for crude oil increases, the cost of solvent additives used in the production of blended oil products, and fuel cost for transportation cost from third party providers will generally increase. Similarly, if the price of crude oil falls, these costs may also decline.
 
General and Administrative Expenses
 
Our general and administrative expenses consist primarily of salaries and other employee-related benefits for executive, administrative, legal, financial and information technology personnel, as well as outsourced and professional services, rent, utilities, and related expenses at our headquarters, as well as certain taxes. 

Depreciation and Amortization Expenses

Our depreciation and amortization expenses are primarily related to the property, plant and equipment and intangible assets acquired in connection with the Holdings, E Source, Omega Refining acquisitions and Warren Ohio Holdings Co., LLC. f/k/a Heartland Group Holdings, LLC (“Heartland”) asset purchase.
 
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2015 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2014
 
Set forth below are our results of operations for the three months ended September 30, 2015 as compared to the same period in 2014.

 

Three Months Ended September 30,

 

 
 

2015

2014

$ Change

% Change
Revenues

$
39,262,584


$
76,903,516


$
(37,640,932
)

(49
)%
Cost of Revenues

34,104,949


73,761,171


(39,656,222
)

(54
)%
Gross Profit

5,157,635


3,142,345


2,015,290


64
 %
Reduction in contingent consideration
 

 
(1,876,752
)
 
1,876,752

 
100
 %
Selling, general and administrative expenses

6,052,764


4,706,104


1,346,660


29
 %
Depreciation and amortization
 
1,597,881

 
1,180,443

 
417,438

 
35
 %
Acquisition related expenses

5,910


259,235


(253,325
)

(98
)%
Income (loss) from operations

(2,498,920
)

(1,126,685
)

(1,372,235
)

122
 %
Other Income (loss)

11


109,980


(109,969
)

(100
)%
Bargain purchase gain related to Omega acquisition
 

 
92,635

 
(92,635
)
 
(100
)%
Other expense

(20,657
)



(20,657
)

100
 %
Gain on futures contracts
 
395,430

 

 
395,430

 
100
 %
Gain on change in value of derivative liability
 
818,051

 

 
818,051

 
100
 %
Interest Expense

(763,791
)

(947,325
)

183,534


(19
)%
Total other income (expense)

429,044


(744,710
)

1,173,754


(158
)%
Income (loss) before income taxes

(2,069,876
)

(1,871,395
)

(198,481
)

11
 %
Income tax (expense) benefit