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Vertex Energy Inc. - Quarter Report: 2011 September (Form 10-Q)

vertex10q093011.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 QUARTERLY PERIOD ENDED SEPTEMBER 30, 2011
 
OR
 
¨ 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 000-53619
 
———————
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  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes  x    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   
¨
Non-accelerated filer  
¨  
Smaller reporting company  
x
 
 

 
 
 

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

State the number of shares of the issuer’s common stock outstanding, as of the latest practicable date: 9,391,084 shares of common stock issued and outstanding as of October 21, 2011.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
TABLE OF CONTENTS
 
    Page
     
 
PART I
 
     
Item 1.
Consolidated Financial Statements
 
F-1
 
Consolidated Balance Sheets
 
F-2
 
Consolidated Statements of Operations (unaudited)
 
F-3
 
Consolidated Statements of Cash Flows (unaudited)
 
F-4
 
Notes to Consolidated Financial Statements  (unaudited)
 
F-5
Item 2.
Management’s Discussion And Analysis Of Financial Condition And Results Of Operations
 
5
Item 3.
Quantitative And Qualitative Disclosures About Market Risk
 
23
Item 4.
Controls and Procedures
23
     
   
PART II
 
     
Item 1.
Legal Proceedings
24
     
Item 1A:
Risk Factors
24
     
Item 2.
Unregistered Sales Of Equity Securities And Use Of Proceeds
24
     
Item 3.
Defaults Upon Senior Securities
25
     
Item 4.
(Removed and Reserved)
25
     
Item 5.
Other Information
25
     
Item 6.
Exhibits
25
 
 

 
 
 

 

PART I – FINANCIAL INFORMATION
 
 
Item 1. Financial Statements



 

 

VERTEX ENERGY, INC.

CONTENTS


     
   
Page
Consolidated  Financial Statements
   
     
Consolidated  Balance Sheets
 
F-2
     
Consolidated  Statements of  Operations
 
F-3
     
Consolidated  Statements of Cash Flows
 
F-4
     
Notes to Consolidated Financial Statements
 
F-5






 


 
F-1

 

 

VERTEX ENERGY, INC.
 
CONSOLIDATED BALANCE SHEETS
 
   
   
September 30,
   
December 31,
 
   
2011
   
2010
 
   
(UNAUDITED)
       
ASSETS
           
             
Current assets
           
  Cash and cash equivalents
  $ 1,317,177     $ 744,313  
  Accounts receivable, net
    5,493,475       1,482,510  
  Accounts receivable- related party
    10,967       -  
  Inventory
    8,766,030       3,901,781  
  Prepaid expenses
    111,866       100,485  
      Total current assets
    15,699,515       6,229,089  
                 
Noncurrent assets
               
  Licensing agreement, net
    1,957,967       1,833,966  
  Fixed assets, net
    156,415       76,290  
      Total noncurrent assets
    2,114,382       1,910,256  
                 
TOTAL ASSETS
  $ 17,813,897     $ 8,139,345  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
 
               
 Current liabilities
               
   Accounts payable and accrued expenses
  $ 7,465,838     $ 4,593,199  
   Accounts payable-related party
    1,093,241       407,273  
   Deposits
    1,080,277       -  
   Line of Credit
    1,000,000       -  
        Total current liabilities
    10,639,356       5,000,472  
                 
Long-term liabilities
               
Mandatorily redeemable preferred stock, Series B, $.001 par value, 2,000,000 shares authorized, 0 and 600,000 issued and outstanding as of September 30, 2011 and December 31, 2010 (includes $150,000 to a related party)
    -        600,000  
        Total liabilities
    10,639,356       5,600,472  
                 
Commitments and contingencies
               
                 
STOCKHOLDERS’ EQUITY
               
                 
Preferred stock, $0.001 par value per share:
               
50,000,000 shares authorized
               
Series A Convertible Preferred stock, $0.001 par value,
    5,000,000 authorized and 4,452,167 and 4,675,716  issued
    and outstanding at September 30, 2011 and  December 31,
    2010, respectively
         4,452            4,676  
Common stock, $0.001 par value per share;
               
   750,000,000 shares authorized; 9,239,398 and 8,370,849
   issued and outstanding at September 30, 2011 and
   December 31, 2010, respectively
      9,239         8,371  
Additional paid-in capital
    3,275,037       2,275,074  
Retained earnings
    3,885,813       250,752  
      Total stockholders’ equity
    7,174,541       2,538,873  
                 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 17,813,897     $ 8,139,345  

 
See accompanying notes to the consolidated financial statements

 
 
F-2

 

CONSOLIDATED STATEMENTS OF OPERATIONS
 
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
 
(UNAUDITED)
 
             
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Revenues
  $ 30,301,326     $ 13,288,600     $ 78,383,111     $ 42,428,741  
Revenues – related parties
    -       1,828       17,978       5,578  
      30,301,326       13,290,428       78,401,089       42,434,319  
                                 
Cost of revenues
    28,268,785       12,471,821       71,632,067       39,679,178  
                                 
Gross profit
    2,032,541       818,607       6,769,022       2,755,141  
                                 
 
Selling, general and
   administrative expenses
    997,723       667,339         3,030,461       2,118,708  
                                 
Income from operations
    1,034,818       151,268       3,738,561       636,433  
                                 
Other income (expense)
                               
   Other income
    -       89,333       -       219,333  
   Interest expense
    (3,593 )     (26,521 )     (57,811 )     (89,119 )
Total other income (expense)
    (3,593 )     62,812       (57,811 )     130,214  
                                 
Income before income tax
    1,031,225       214,080       3,680,750       766,647  
                                 
Income tax expense
    (3,000 )     (5,500 )     (45,689 )     (5,500 )
                                 
Net income
  $ 1,028,225     $ 208,580     $ 3,635,061     $ 761,147  
                                 
Earnings per common share
                               
     Basic
  $ 0.11     $ 0.03     $ 0.42     $ 0.09  
     Diluted
  $ 0.06     $ 0.02     $ 0.25     $ 0.06  
                                 
Shares used in computing earnings per share
                               
     Basic
    9,187,227       8,315,309       8,722,642       8,276,184  
     Diluted
    15,851,393       13,581,067       14,503,882       13,540,455  
                                 
                                 
                                 
                                 

See accompanying notes to the consolidated financial statements

 
 
F-3

 




VERTEX ENERGY, INC.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
 
(UNAUDITED)
 
       
   
Nine Months Ended
 
   
September 30,
2011
   
September 30,
2010
 
 
             
             
Cash flows operating activities
           
  Net income
  $ 3,635,061     $ 761,147  
  Adjustments to reconcile net income to cash
               
  provided by (used in) operating activities
               
         Stock based compensation expense
    94,358       135,923  
         Depreciation and amortization
    120,138       107,781  
     Changes in assets and liabilities
               
       Accounts receivable
    (4,010,965 )     (400,132 )
       Accounts receivable- related parties
    (10,967 )     -  
       Inventory
    (4,864,249 )     558,543  
       Prepaid expenses
    (11,381 )     29,253  
       Accounts payable
    2,872,639       (1,216,988 )
       Accounts payable-related parties
    685,968       39,840  
       Other deposits
    1,080,277       -  
  Net cash provided by (used in) operating activities
    (409,121 )     15,367  
                 
Cash flows from investing activities
               
   Purchase of intangible assets
    (232,214 )     (260,401 )
   Purchase of fixed assets
    (92,051 )     (8,653 )
   Net cash used in investing activities
    (324,265 )     (269,054 )
                 
Cash flows from financing activities
               
   Proceeds from sale of Series B Preferred “B” stock
    -       600,000  
   Proceeds from exercise of common stock warrants
    306,250       33  
   Line of credit proceeds, net
    1,000,000       1,000,000  
   Payments on due to related party balance
    -       (841,855 )
   Net cash provided by financing activities
    1,306,250       758,178  
                 
Net increase in cash and cash equivalents
    572,864       504,491  
                 
Cash and cash equivalents at beginning of the period
    744,313       514,136  
                 
Cash and cash equivalents at end of period
  $ 1,317,177     $ 1,018,627  
                 
SUPPLEMENTAL INFORMATION
               
   Cash paid for interest during the period
  $ 78,505     $ 70,719  
   Cash paid for income taxes during the period
  $ 56,000     $ 5,500  
                 
NON-CASH TRANSACTIONS
               
   Conversion of Series A Preferred Stock into common stock
  $ 224     $ 55  
   Conversion of Series B Preferred Stock into common stock
  $ 600,000     $ -  
 
See accompanying notes to the consolidated financial statements

 
 
F-4

 
VERTEX ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011
(UNAUDITED)

NOTE 1.  BASIS OF PRESENTATION

The accompanying unaudited consolidated interim financial statements of Vertex Energy, Inc. (the “Company,” 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 on March 31, 2011 (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 2010 as reported in Form 10-K, have been omitted.

NOTE 2.  RELATED PARTIES

The Company has numerous transactions with Vertex Holdings, L.P., formerly Vertex Energy, L.P. (also defined herein as the “Partnership” or “Vertex LP”), including the lease of the Partnership’s storage facility, subletting of office space, transportation of feedstock to re-refiners and the Company’s storage facility, and delivery from the Company’s re-refinery to end customers. The pricing under these contracts is with certain wholly-owned subsidiaries of the Partnership and is priced at market, and is reviewed periodically from time to time by the Board of Director’s Related Party Transaction committee.  The Related Party Transaction committee includes at least two independent directors and will review and pre-approve any and all related party transactions.

The consolidated financial statements include revenues from related parties of $17,978 and $5,578 and inventory purchases from related parties of $9,632,599 and $4,012,026 for the nine months ended September 30, 2011 and 2010, respectively.  As of September 30, 2011, the Company owes $1,093,241 of accounts payable to related parties including Cedar Marine Terminal (“CMT”), H&H Oil Baytown, H&H Oil Austin and H&H Oil Corpus. These entities are majority-owned and controlled by our Chief Executive Officer and Chairman, Benjamin P. Cowart.  The Company also incurred process costs of $5,204,117 and $4,384,251 for the nine months ended September 30, 2011 and 2010, respectively.  The costs arise from the Thermal Chemical Extraction Process (“TCEP”) operating agreement with CMT, whereby we pay up to $0.40 per gallon of processing costs.  In the past, both parties have agreed to share increased costs.

The Company subleases office space from Vertex L.P. Rental payments under the lease are $6,600 per month and the lease will expire in June 2012.

The Company leases approximately 30,000 barrels in storage capacity for its Black Oil division at Cedar Marine Terminal, located in Baytown, Texas.  The monthly lease expense is $22,500 and the lease expired in March 2011; however, the parties have agreed to an extension of the lease with the same terms and conditions through June 2012; provided that the terms of such extension are still subject to the approval of the Related Party Transaction Committee.

The Company leases approximately 45,000 barrels in storage capacity for its TCEP division at CMT, located in Baytown, Texas.  The monthly lease expense is $45,000 and the lease expired in March 2011; however, the parties have agreed to an extension of the leases with thesame terms and conditions, other than an increase in the monthly lease expense to $49,500 in consideration for an additional rental of 3,000 barrels of capacity. Through June 2012; provided that the terms of such extension are still subject to the approval of the Related Party Transaction Committee.

 
F-5

 
VERTEX ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011
(UNAUDITED)

NOTE 3.  CONCENTRATIONS, SIGNIFICANT CUSTOMERS, COMMITMENTS AND CONTINGENCIES

The Company has concentrated credit risk for cash by maintaining deposits in one bank.  These balances are insured by the Federal Deposit Insurance Corporation up to $250,000.  From time to time during the nine months ended September 30, 2011, the Company’s cash balances exceeded the federally insured limits. No losses have been incurred relating to this concentration.


At September 30, 2011 and 2010 and for each of the nine months then ended, the Company’s revenues and receivables were comprised of the following customer concentrations:
     
2011
 
2010
     
% of
% of
 
% of
% of
     
Revenues
Receivables
 
Revenues
Receivables
Customer 1
   
48%
46%
 
19%
0%
Customer 2
   
12%
16%
 
19%
25%
Customer 3
   
10%
7%
 
8%
14%
Customer 4
   
10%
0%
 
19%
37%
Customer 5
   
1%
15%
 
0%
0%
Customer 6
   
6%
 0%
 
 8%
25%
Customer 7
   
0%
0%
 
11%
0%
 
 

The Company purchases goods and services from two companies that represented 22% and 12% of total purchases for the nine months ended September 30, 2011.

The Company has several purchase agreements with suppliers that require purchases of minimum quantities of the Company’s products.  The agreements generally have a one year term, after which they become month-to-month agreements.  There are no penalties associated with these agreements.  Minimum future purchases under these contracts are approximately $17,547,426 through March 31, 2012 based on forward contract pricing as of October 21, 2011.             .

The Company has one debt facility available for use, of which there was $1,000,000 and $0 outstanding as of September 30, 2011 and December 31, 2010, respectively. See note 4 for further details.

On August 2, 2011, the Company entered into an engagement with a merchant banking firm to assist in certain acquisitions and financial advisory services that the Company might contemplate.  The Company paid an initial advisory fee of $20,000.  In addition, the Company has agreed to pay certain other fees based on the success of closing an actual transaction.

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 product that the Company can economically produce.

 
F-6

 
VERTEX ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011
(UNAUDITED)
 
 
The Company, in its normal course of business, is involved in various other claims and legal action.  In the opinion of management, the outcome of these claims and actions will not have a material adverse impact upon the financial position of the Company.

We intend to take advantage of any potential tax benefits related to net operating losses (“NOLs”) acquired as part of the World Waste merger.  As a result of the merger we acquired approximately $42 million of net operating losses that may be used to offset taxable income generated by the Company in future periods.
 
It is possible that the Company may be unable to use these NOLs in their entirety.  The extent to which the Company will be able to utilize these carry-forwards in future periods is subject to limitations based on a number of factors, including the number of shares issued within a three-year look-back period, whether the merger is deemed to be a change in control, whether there is deemed to be a continuity of World Waste’s historical business, and the extent of the Company’s subsequent income. As of December 31, 2010, the company had utilized $1,616,638 of these NOLs leaving approximately $39.8 million of potential NOLs of which we expect to utilize approximately $3.6 million for the nine months ended September 30, 2011.


NOTE 4. NOTES PAYABLE

In September 2010, the Company entered into a loan agreement and obtained a line of credit with Bank of America Merrill Lynch. The balance on the line of credit was $1,000,000 and $2,350,000 was available at September 30, 2011. On September 22, 2011 Bank of America provided an extension on the line of credit through December 31, 2011 and the Company will renegotiate the terms of the loan agreement at this date. The loan agreement is guaranteed by CMT, a related party of the Company.  The most restrictive covenant of the loan requires an interest coverage ratio of at least 1.5 to 1.  The Company believes it was in compliance of all aspects of the agreement at September 30, 2011.

The financing arrangement discussed above is secured by all of the assets of the Company.  Management of Vertex Energy believes that with the financing arrangements, in addition to projected earnings, it will have sufficient liquidity to fund the Company’s operations for the foreseeable future, although it may seek additional financing to fund acquisitions or other development in the future.

On October 15, 2010, we entered into a sales/purchase agreement with a supplier requiring the Company to provide a standby letter of credit in the amount of $900,000, which was amended to $550,000 on May 20, 2011 and to $150,000 on August 26, 2011. The expiration date was amended from October 14, 2011 to November 30, 2011.

NOTE 5. STOCK BASED COMPENSATION

The stock based compensation cost that has been charged against income by the Company was $94,358 and $135,923 for the nine months ended September 30, 2011 and 2010, respectively, for options previously awarded by the Company.

In June 2011, we extended our consulting agreement for investor relations services.  The agreement was made effective as of April 15, 2011 and remained in effect until October 14, 2011.  We agreed to compensate the consultant with a monthly fee and reimbursement of expenses incurred in connection with and pursuant to the agreement.  The agreement may be terminated by either party at any time upon 30 days written notice.  In addition the Company granted the consultant warrants to purchase 25,000 shares of our common stock, with cashless exercise rights, at an exercise price of $1.75 per share. On May 10, 2011, the date of grant, 6,250 shares vested immediately and the remainder vest at 33 1/3% per year over the next three years.  The fair value of these warrants on the date of grant was $11,201.


 
F-7

 
VERTEX ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011
(UNAUDITED)



Effective September 23, 2011, the Company’s Board of Directors approved the grant of 390,000 incentive stock options to certain employees, directors and officers of the Company in connection with the Company’s 2009 Stock Incentive Plan.  The 390,000 options vest in equal portions annually over four years and are exercisable for ten years. The exercise price of 365,000 options is $2.75 per share and their fair value on the issuance date was $267,579.  The exercise price of 25,000 options is $3.03 and their fair value on the issuance date was $16,012. The Company expensed $5,907 related to these options during the quarter ended September 30, 2011.

Stock option activity for the nine months ended September 30, 2011 is summarized as follows:

   
Shares
   
Weighted Average Exercise Price
   
Weighted Average Remaining Contractual Life (in Years)
   
Grant Date Fair Value
 
Outstanding at December 31, 2010
    2,703,334     $ 5.81       7.60     $ 715,826  
Options granted
    390,000       2.77       10.00       283,591  
Options exercised
    (5,000 )     (.45 )     -       (1,800 )
Options cancelled/forfeited/expired
    (15,000 )     (.62 )     -       (6,622 )
Outstanding at September 30, 2011
    3,073,334     $ 5.46       7.25     $ 990,995  
                                 
Vested at September 30, 2011
    1,836,964     $ 8.24       6.43     $ 363,211  
                                 
Exercisable at September 30, 2011
    1,836,964     $ 8.24       6.43     $ 363,211  
                                 

A summary of the Company’s stock warrant activity and related information for the nine months ended September 30, 2011 is as follows:
   
Shares
   
Weighted Average Exercise Price
   
Weighted Average Remaining Contractual Life (in Years)
   
Grant Date Fair Value
 
Outstanding at December 31, 2010
    1,773,457     $ 14.24       1.96     $ 172,973  
Warrants granted
    25,000       1.75       4       11,201  
Warrants exercised
    (40,000 )     (.10 )     (2.04 )     (2,342 )
Warrants cancelled/forfeited/expired
    (363,146 )     (26.02 )     -       (21,789 )
Warrants at September 30, 2011
    1,395,311     $ 11.35       1.65     $ 160,043  
                                 
Vested at September 30, 2011
    1,303,651     $ 12.15       1.76     $ 135,475  
                                 
Exercisable at September 30, 2011
    1,303,651     $ 12.15       1.76     $ 135,475  
                                 

NOTE 6. EARNINGS (LOSS) PER SHARE

Basic earnings per share includes no dilution and is computed by dividing income  available to common shareholders by the weighted average number of common shares outstanding for the periods presented. The calculation of basic earnings per share for the nine months ended September 30, 2011 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, 2011 does not include options to purchase 1,910,858 shares and warrants to purchase 1,228,714 shares due to their anti-dilutive effect.

 
F-8

 
 
VERTEX ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011
(UNAUDITED)
 
 
The following is a reconciliation of the numerator and denominator for basic and diluted earnings per share for the nine months ended September 30, 2011 and 2010:

    2011     2010  
             
Basic Earnings per Share
           
Numerator:
           
     Income  available to common shareholders
  $ 3,635,061     $ 761,147  
Denominator:
               
    Weighted-average shares outstanding
    8,722,642       8,276,184  
                 
Basic earnings per share
  $ 0.42     $ 0.09  
 
 
 
 
 
 
               
Diluted Earnings per Share
               
Numerator:
               
     Income
  $ 3,635,061     $ 761,147  
Denominator:
               
     Weighted-average shares outstanding
    8,722,642       8,276,184  
     Effect of dilutive securities
               
          Stock options and warrants
    1,329,073       563,998  
          Preferred stock
    4,452,167       4,700,273  
                 
     Diluted weighted-average shares outstanding
    14,503,882       13,540,455  
                 
Diluted earnings per share
  $ 0.25     $ 0.06  

NOTE 7. 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, 2011 there were 9,239,398 common shares issued and outstanding.

During the nine months ending September 30, 2011 there were 223,549 shares of the Company's Series A Preferred Stock converted into the Company's common stock and warrants and options to purchase 45,000 shares of the Company's common stock were exercised for cash proceeds of $6,250. In addition, 600,000 shares of the Series B Preferred Stock were converted into the Company's common stock as discussed in note 8.

 
F-9

 
VERTEX ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011
(UNAUDITED)
 
 
During September 2011, $300,000 was received for warrants to purchase 150,000 shares that were in the process of being exercised for shares of common stock, but which have not been issued as of September 30, 2011.

NOTE 8.  PREFERRED STOCK

The total number of authorized shares of the Company’s preferred stock is 50,000,000 shares, $0.001 par value per share. The total number of designated shares of the Company’s Series A Preferred Stock is 5,000,000 (“Series A Preferred”).  The total number of designated shares of the Company’s Series B Preferred Stock is 2,000,000. As of September 30, 2011, there were 4,452,167 shares of Series A Preferred Stock issued and outstanding and no Series B Preferred shares issued and outstanding.

From June 2, 2011 to June 15, 2011(ten consecutive trading days) the trading price of the Company’s common stock on the Over-The-Counter Bulletin Board closed at equal to or greater than $2.00 per share, which triggered the Automatic Conversion Provision of the Series B Preferred Stock. As a result, effective June 15, 2011, all 600,000 previously outstanding shares of Series B Preferred Stock automatically converted, without any required action by any holder, into 600,000 shares of the Company’s common stock. The Company recognized $33,200 of interest expense related to the Series B Preferred Stock liability during the nine months ending September 30, 2011.

NOTE 9.  LICENSING AGREEMENT

The Company operates under an operating and licensing agreement with a related party that is majority-owned and controlled by the Company’s Chief Executive Officer and Chairman, Benjamin P. Cowart, that provides for an irrevocable, non-transferable, royalty-free, perpetual right to use TCEP to re-refine certain used oil feedstock and associated operations of this technology on a global basis.  This includes the right to utilize the technology in any future production facilities built by the Company.  If the related entity is unable to continue operations, the Company would not have a source of its TCEP products to sell to customers, which could negatively impact sales. The Company must approve any research and development costs that are performed by the related party and this may affect the related party’s ability to maintain technological feasibility of the technology which could impact the value of the license. The Company will continue to make expenditures on the development of the process in the foreseeable future, which could be significant. We believe the license is technologically feasible; however, we believe we can make improvements that will enhance the TCEP process and design.

The initial valuation of the license was based upon the cost to acquire the use of TCEP and its processes. It will be assessed over time for changes in the valuation. Additional development costs capitalized during the nine months ended September 30, 2011 and 2010 were $232,214 and $260,401, respectively. The Company is amortizing the value of the license agreement over a fifteen year period.  Amortization expense was $108,212 and $95,581 for the nine months ending September 30, 2011 and 2010, respectively.  No indications of impairment of the license existed as of September 30, 2011.
 
 
 

 
 
F-10

 
 
VERTEX ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011
(UNAUDITED)
 
NOTE 10.  SEGMENT REPORTING

The Company’s reportable segments include the Black Oil and Refining & Marketing divisions.  Segment information for the three and nine months ended September 30, 2011 and 2010, are as follows:

NINE MONTHS ENDED SEPTEMBER 30, 2011
 
   
         
Refining &
       
   
Black Oil
   
Marketing
   
Total
 
Revenues
  $ 15,101,466     $ 63,299,623     $ 78,401,089  
                         
Net income from operations
  $ 330,072     $ 3,408,489     $ 3,738,561  
                         
Total Assets
  $ 5,816,438     $ 11,997,459     $ 17,813,897  
                         
   
NINE MONTHS ENDED SEPTEMBER 30, 2010
 
   
           
Refining &
         
   
Black Oil
   
Marketing
   
Total
 
Revenues
  $ 14,726,733     $ 27,707,586     $ 42,434,319  
                         
Net income (loss) from operations
  $ 867,248     $ (230,815 )   $ 636,433  
                         
                         
THREE MONTHS ENDED SEPTEMBER 30, 2011
 
   
           
Refining &
         
   
Black Oil
   
Marketing
   
Total
 
Revenues
  $ 6,253,317     $ 24,048,009     $ 30,301,326  
                         
Net income from operations
  $ 290,823     $ 743,995     $ 1,034,818  
                         
                         
   
THREE MONTHS ENDED SEPTEMBER 30, 2010
 
   
           
Refining &
         
   
Black Oil
   
Marketing
   
Total
 
Revenues
  $ 6,673,791     $ 6,616,637     $ 13,290,428  
                         
Net income (loss) from operations
  $ 618,060     $ (466,792 )   $ 151,268  
                         
 

 
 
F-11

 
VERTEX ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011
(UNAUDITED)
 
NOTE 11. SUBSEQUENT EVENTS

Subsequent to September 30, 2011, the available credit on the Line of Credit is $3,500,000 of which $150,000 has been allocated to the outstanding letter of credit.  As of October 24, 2011 the outstanding balance drawn on the line of credit is $0 leaving an available balance for draw downs of $3,350,000.

Subsequent to September 30, 2011, a total of 1,686 shares of the Company’s Series A Preferred Stock were converted into 1,686 shares of the Company’s common stock and warrants to purchase 150,000 shares of the Company’s common stock at an exercise price of $2 per share were exercised for $300,000 and the Company issued 150,000 shares of the Company’s common stock.
 
In October 2011, the Company entered into an agreement to supply used oil feedstock to a third party.  The agreement provides for the Company to supply a minimum of 210,000 gallons of used oil feedstock per month at purchase prices based on a discount to the “Platt’s Oilgram Price Report”, with such discount reviewed and agreed upon monthly.  The agreement continues in effect until April 5, 2012.





 
 
 
 
 
 
 
F-12

 

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

 
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
 
We caution you that this report contains forward-looking statements regarding, among other things, financial, business, and operational matters.
 
All statements that are included in this Quarterly Report, other than statements of historical fact, are forward-looking statements. Forward-looking statements involve known and unknown risks, assumptions, uncertainties, and other factors. Statements made in the future tense, and statements using words such as “may,” “can,” “could,” “should,” “predict,” “aim’” “potential,” “continue,” “opportunity,” “intend,” “goal,” “estimate,” “expect,” “expectations,” “project,” “projections,” “plans,” “anticipates,” “believe,” “think,” “confident,” “scheduled,” or similar expressions are intended to identify forward-looking statements. Forward-looking statements are not a guarantee of performance and are subject to a number of risks and uncertainties, many of which are difficult to predict and are beyond our control. These risks and uncertainties could cause actual results to differ materially from those expressed in or implied by the forward-looking statements, and therefore should be carefully considered. We caution you not to place undo reliance on the forward-looking statements, which speak only as of the date of this report. We disclaim any obligation to update any of these forward-looking statements as a result of new information, future events, or otherwise, except as expressly required by law.
 
Please see the “Glossary of Selected Terms” incorporated by reference hereto as Exhibit 99.6, for a list of abbreviations and definitions used throughout this report.

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 ("Vertex LP"), us, World Waste Technologies, Inc., a California corporation (“WWT” or “World Waste”), Vertex Merger Sub, LLC, a California limited liability company and our wholly-owned subsidiary ("Merger Subsidiary"), and Benjamin P. Cowart, our Chief Executive Officer, as agent for our shareholders (as amended from time to time, the “Merger Agreement”). Effective on April 16, 2009, World Waste merged with and into Merger Subsidiary, with Merger Subsidiary continuing as the surviving corporation and becoming our wholly-owned subsidiary (the "Merger"). In connection with the Merger, (i) each outstanding share of World Waste common stock was cancelled and exchanged for 0.10 shares of our common stock; (ii) each outstanding share of World Waste Series A preferred stock was cancelled and exchanged for 0.4062 shares of our Series A preferred stock; and (iii) each outstanding share of World Waste Series B preferred stock was cancelled and exchanged for 11.651 shares of our Series A preferred stock.

Additionally, as a result of the Merger, as the successor entity of World Waste, we assumed World Waste’s filing obligations with the Securities and Exchange Commission and our common stock began trading on the Over-The-Counter Bulletin Board under the symbol “VTNR.OB” effective May 4, 2009.  The previous trading symbol on the Over-The-Counter Bulletin Board was “WDWT.OB”.  Finally, as a result of the Merger, the common stock of World Waste was effectively reversed one for ten (10) as a result of the exchange ratios set forth in the Merger, and unless otherwise noted, the impact of such effective reverse stock split, created by the exchange ratio set forth above, is retroactively reflected throughout this report.

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 purchase these wastes from an established network of local and regional collectors and generators.  We manage the transport, storage and delivery of the aggregated feedstock and product streams to end users.  Our Company operates in two divisions. Our Black Oil division aggregates used motor oil from third-party collectors and sells used 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 our customers.
 
 
 
5

 
Black Oil Division
 
           Our Black Oil division, which has been in business since 2001, aggregates and sells used motor oil. We have a network of approximately 50 suppliers that collect used oil from businesses such as oil change service stations, automotive repair shops, manufacturing facilities, petroleum refineries, and petrochemical manufacturing operations.  We purchase the used oil from collectors and manage the logistics of transport, storage and delivery to our customers.  Typically, we sell used oil 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, a minimum volume is sold to our customers, and we are insulated from inventory risk by a spread between the costs to acquire used oil and the revenues received from the sale and delivery of used oil.
 
Refining and Marketing Division
 
           Our Refining and Marketing division, which has been in business since 2004, aggregates used motor oil, petroleum distillates, transmix and other off-specification chemical products. These feedstock streams are purchased from pipeline operators, refineries, chemical processing facilities and third-party providers. We have toll-based processing agreements in place with Cedar Marine Terminal and KMTEX to re-refine these feedstock streams, under our direction, into various end products that we specify.  Cedar Marine Terminal is a related party and uses the proprietary Thermal Chemical Extraction Process (“TCEP”) technology to re-refine used oil into marine fuel cutterstock and a higher-value feedstock for further processing.  KMTEX, Ltd. (“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.

We currently provide our services in 13 states, primarily in the Gulf Coast and Central Midwest Region of the United States.  During the nine month period ending September 30, 2011, we aggregated approximately 35 million gallons of used motor oil and other petroleum by-product feedstocks and managed the re-refining of approximately 15.5 million gallons of used motor oil with our proprietary TCEP process and through our third party processing agreement.

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 the shareholders of Vertex.  We can provide no assurance that the ongoing venture will successfully bring any projects to a point of financing or successful construction and operation.

Reliance on Contracts and Relationships; Low Capital Intensive Business
 
We currently have no significant capital assets and instead contract on a fee-paid basis for the use of all assets we deem to be necessary to conduct our operations, from either independent third-parties or related-parties, pursuant to the License and Operating Agreement, described below, and other related party agreements described in greater detail in our Report on Form 10-K, filed with the Commission on March 31, 2011. These assets are made available to us at market rates which are periodically reviewed by the Related Party Transaction Committee of the Company’s Board of Directors.

 
 
6

 
We also have an agreement in place with KMTEX, pursuant to which KMTEX has agreed to process feedstock of certain petroleum distillates, which we provide to KMTEX, into more valuable feedstocks, including pygas, gasoline blend stock and cutter stock, which agreement expired on June 30, 2011, provided that Vertex believes that it will be able to renew or extend such agreement subsequent to the date of this Report as the parties have continued to operate under the terms of the agreement subsequent to its expiration. We are in discussions with KMTEX to extend or renew this agreement and have no reason to believe such agreement will not be extended or renewed.  In connection with and pursuant to the agreement, we pay KMTEX certain monthly tank rental fees, truck and rail car fees, and processing fees based on the weight of the material processed by KMTEX, as well as certain disposal fees and other fees.

Operating and Licensing Agreement

In connection with the Merger and effective as of the effective date of the Merger, we entered into an Operating and Licensing Agreement (the “Operating Agreement”) with Cedar Marine Terminals, L.P., a subsidiary of Vertex LP (“CMT”).  CMT is controlled by Vertex LP, an entity which is majority-owned and controlled by our Chief Executive Officer and Chairman, Benjamin P. Cowart.  Pursuant to the Operating Agreement, CMT agreed to provide services to us in connection with the operation of the Terminal run by CMT, and the operations of and use of the TCEP, in connection with a Terminaling Agreement by and between CMT and Vertex LP.  Additionally, we have the right to use the first 33,000 monthly barrels of the capacity of the TCEP pursuant to the terms of the Operating Agreement, with CMT being provided the right to use the next 20,000 barrels of capacity and any additional capacity allocated pro rata (based on the percentages above), subject to separate mutually agreeable allocations.

The Operating Agreement has a term expiring on February 28, 2017, and can be terminated (a) by the mutual consent of both parties, (b) with thirty days prior written notice, if any term of the agreement is breached, by the non-breaching party, or (c) at any time after the R&D Costs (as defined below) are paid and Mr. Cowart’s employment has been terminated by Vertex; provided that the parties intend for the rights granted pursuant to the License (defined below) to be perpetual.

In consideration for the services to be rendered pursuant to the Operating Agreement, we agreed to pay CMT its actual costs and expenses associated with providing such services, plus 10%, subject to a maximum price per gallon of $0.40, subject to CMT meeting certain minimum volume requirements as provided in the agreement. The maximum price to be paid per gallon is subject to change based on the mutual agreement of both parties and during the first quarter of 2010 we agreed to pay CMT its actual costs and expenses (which exceeded $0.40 per gallon) associated with providing such services, plus 10%, not withstanding the maximum price per gallon.  This decision was made in light of unanticipated per gallon costs greater than $0.40 per gallon incurred during the start-up phase of the plant.  As of the date of this filing we are no longer operating under this structure, and are operating under the original structure of the agreement, as the costs at the end of the first quarter of 2011 were maintained at levels below $0.40 per gallon and we expect they will continue at these levels going forward.

Pursuant to the Operating Agreement, we also have the right to a non-revocable, non-transferable, royalty-free, perpetual (except as provided in the agreement) license to use the technology associated with the operations of the thermal chemical extraction process (the “TCEP”) and the “License”) which we have fully paid for in the amount of $2,252,118 (the “R&D Costs”), in any market in the world (except at CMT’s Baytown facility where it is non-exclusive).

We currently estimate the cost to construct a new, fully -functional, commercial facility with annual processing capacity of between 25 and 30 million gallons at another location would be approximately $2.5 to $5.0 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.

 
7

 
Strategy and Plan of Operations

The Principal elements of our strategy include:

 
·
Grow our Core Business. Our focus is to continue to supply used motor oil and other petroleum by-product feedstock, as well as our re-refined products to existing customers and to cultivate additional feedstock supply volume by expanding relationships with existing suppliers and developing new supplier relationships. We will seek to maintain good relations with existing suppliers, customers and vendors and the high levels of customer service necessary to maintain these businesses. We also plan to seek to develop relationships with additional re-refining facilities to serve as such facilities’ primary and exclusive feedstock provider.

 
·
Re-Refine Higher Value End Products.  We intend to develop, lease, or acquire technologies to re-refine our feedstock supply into higher-value end products, including assets or technologies which complement TCEP.  Currently, we are using TCEP to re-refine used oil feedstock into cutterstock for use in the marine fuel market.  We believe that the expansion of TCEP facilities and our technology, and investments in additional technologies, will enable us to upgrade feedstock into end products, including lubricating base oil, that command higher market prices than the current re-refined products we produce.

 
·
Expand TCEP Re-Refinement Capacity.  We intend to expand our licensed TCEP capacity by building our own TCEP facilities to re-refine feedstock.  We believe the TCEP process has a distinct competitive advantage over conventional re-refining technology because it produces a high-quality, fuel oil product, and the capital expenditures required to build a TCEP processing plant are significantly lower than a comparable conventional re-refining facility.  By continuing the transition from our historical role as a value-added logistics provider to operating as a re-refiner, we believe we will be able to leverage our existing feedstock supply network and aggregation capabilities to upgrade a larger percentage of our feedstock inventory into higher value end products which we believe should drive increased revenue and gross margins. We intend to build TCEP facilities near the geographic location of substantial feedstock sources where we have relationships with through our aggregation business.  By establishing TCEP facilities near proven feedstock sources, we seek to lower our transportation costs and lower the risk of operating plants at low capacity.
 
 
·
Pursue Selective Strategic Relationships Or Acquisitions.  We plan to grow market share by consolidating feedstock supply through partnering with or acquiring collection and aggregation assets.  Such acquisitions and/or partnerships could increase our revenue and provide better control over the quality and quantity of feedstock available for resale and/or upgrading as well as providing additional locations for the implementation of TCEP.

Additionally, the Board of Directors has recently formed a sub-committee of the Related Party Transaction Committee to begin reviewing a potential acquisition of certain assets and/or business units related to Vertex LP, which is a related party, controlled by Benjamin P. Cowart, our largest shareholder, President and Director.   As part of the Company’s merger transaction with World Waste Technologies, Inc. and Vertex LP, which closed on April 16, 2009, the Company was provided (1) a right of first refusal to match any third-party offer to purchase Vertex LP or its related entities (collectively the “Vertex LP Entities”) on the terms and conditions set forth in such offer; and (2) the option, exercisable in our sole discretion any time after the 18-month anniversary of the closing of the merger (which date was October 16, 2010) and so long as Mr. Cowart is employed by the Company, to purchase all or any part of the outstanding stock or assets of any of the Vertex LP Entities owned by Vertex LP or VTX, Inc. (its general partner, which is also controlled by Mr. Cowart), at a price based on an independent third-party valuation and appraisal of the fair market value of such Vertex LP Entity.

Pursuant to the Merger Agreement, the Company formed the Related Party Transaction Committee which is required to include at least two “independent directors” (defined as any individuals who do not beneficially own more than 5% of the outstanding voting shares of the Company, are not employed by, or officers of the Company or any entity related to Mr. Cowart, are not directors or managers of any such company, are not family members of Mr. Cowart, and would qualify as “Independent Directors” as defined in the rules and regulations of the New York Stock Exchange). The Related Party Transaction Committee is charged with the review and pre-approval of any and all related party transactions, including between Vertex and Vertex LP, Mr. Cowart, or any other company or individual which may be affiliated with Mr. Cowart.  The recently formed sub-committee of the Related Party Transaction Committee including David Phillips, Dan Borgen and John Pimentel, will review and advise the Related Party Transaction Committee and the Board of Directors in connection with the potential exercise by the Company of the Right of First Refusal.

 
8

 
           The Company has not entered into any definitive agreements or understandings to acquire any assets or securities of the Vertex LP Entities or to exercise its Right of First Refusal to date, but may enter into such agreements or understandings in the future.  Such transaction may include the Company assuming and/or acquiring substantial amounts of debt or liabilities; the payment of substantial cash consideration; and/or the issuance of significant non-cash consideration consisting of preferred stock, shares of our common stock or warrants to purchase shares of our common stock, which may result in substantial dilution of the ownership interests of existing shareholders and may significantly dilute the Company’s common stock book value. Such issuances may also serve to enhance existing management’s ability to maintain control of the Company because the shares may be issued to parties or entities committed to supporting existing management.   Any agreements or understandings would be subject to the approval of the management and owners of the Vertex LP Entities which may be acquired, the Company’s Related Party Transaction Committee, and where applicable under state or federal law, the approval of the Company’s shareholders.

Recent Events

On August 2, 2011 the Company entered into an exclusive engagement agreement with a merchant banking firm to assist and advise the Company in connection with certain potential acquisitions of third party companies that the Company may contemplate or complete in the future and to provide general financial advisory services to the Company.  In consideration for agreeing to provide such services, the Company paid a one-time advisory fee of $20,000 to the advisor.  In addition to the one-time advisory fee, the Company has agreed to pay certain success fees to the advisor upon the consummation of an actual transaction as contemplated under the agreement and based on the ultimate value of such transaction.  Such success fees are due if a transaction (as defined and described in the agreement) is consummated during the term of the agreement or within 12 months after the term of the agreement.  The agreement can be terminated at any time by either party with written notice to the non-terminating party.
 
In October 2011, the Company entered into an agreement to supply used oil feedstock to a third party.  The agreement provides for the Company to supply a minimum of 210,000 gallons of used oil feedstock per month at purchase prices based on a discount to the “Platt’s Oilgram Price Report”, with such discount reviewed and agreed upon monthly.  The agreement continues in effect until April 5, 2012.
 
 
 
 

 
 
9

 
RESULTS OF OPERATIONS

Description of Material Financial Line Items:

Revenues

We generate revenues from two existing operating divisions as follows:

BLACK OIL - Revenues for our Black Oil division are comprised primarily of feedstock sales (used motor oil) which are purchased from a network of local and regional suppliers.  Volumes are consolidated for efficient delivery and then sold to third-party re-refiners and fuel oil blenders for the export market.

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.  In addition, the Refining and Marketing division purchases black oil which is then re-refined through TCEP.  The finished product is then sold by barge as a fuel oil cutterstock and a feedstock component for major refineries.

Our revenues are affected by changes in various commodity prices including crude oil, natural gas and #6 oil.

Cost of Revenues

BLACK OIL - Cost of revenues for our Black Oil division are comprised primarily of feedstock purchases from a network of providers. Other cost of revenues include transportation costs incurred by third parties, purchasing and receiving costs, analytical assessments, brokerage fees and commissions, surveying and storage costs.

REFINING AND MARKETING - The Refining and Marketing division incurs cost of revenues relating to the purchase of feedstock, purchasing and receiving costs, and inspection and processing of the feedstock into gasoline blendstock, pygas and fuel oil cutter by a third party. Cost of revenues also includes broker’s fees, inspection and transportation costs.
 
Our cost of revenues are affected by changes in various commodity indices, including crude oil, natural gas and #6 oil.  For example, if the price for crude oil increases, the cost of solvent additives used in the production of blended oil products, and fuel cost for transportation cost from third party providers will generally increase. Similarly, if the price of crude oil falls, these costs may also decline.

General and Administrative Expenses
 
Our general and administrative expenses consist primarily of salaries and other employee-related benefits for executive, administrative, legal, financial and information technology personnel, as well as outsourced and professional services, rent, utilities, and related expenses at our headquarters, as well as certain taxes.
 
 
 
 
10

 
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2010
 
Set forth below are our results of operations for the three months ended September 30, 2011, as compared to the same period in 2010.  In the comparative tables below, increases in revenue/income or decreases in expense (favorable variances) are shown without parentheses while decreases in revenue/income or increases in expense (unfavorable variances) are shown with parentheses in the “$ Change” and “% Change” columns.
 
   
Three Months Ended September 30,
       
   
2011
   
2010
   
$ Change
   
% Change
 
   
(unaudited)
             
Revenues
  $ 30,301,326     $ 13,290,428     $ 17,010,898       128 %
                                 
Cost of Revenues
    28,268,785       12,471,821       (15,796,964 )     (127 )%
                                 
Gross Profit
    2,032,541       818,607       1,213,934       148 %
                                 
Selling, general and administrative expenses
    997,723       667,339       (330,384 )     (50 )%
                                 
Income (loss) from operations
    1,034,818       151,268       883,550       584 %
                                 
Other Income
    -       89,333       (89,333 )     (100 )%
Interest Expense
    (3,593 )     (26,521 )     22,928       86 %
Income Tax
    (3,000 )     (5,500 )     2,500       45 %
                                 
Net income
  $ 1,028,225     $ 208,580     $ 819,645       393 %

Each of our segments’ gross profit during the three months ended September 30, 2011 and 2010 was as follows (increases in revenue and/or decreases in cost of revenues are shown without parentheses while decreases in revenue and/or increases in cost of revenues are shown with parentheses in the “$ Change” and “% Change” columns):
 
 
 
                         
   
 Three Months Ended September 30,
             
    2011     2010     $ Change     $ Change  
Black Oil Segment
  (unaudited)              
                                 
Total revenue
  $ 6,253,317     $ 6,673,791     $ (420,474 )     (6 )%
Total cost of revenue
  $ 5,610,880     $ 5,802,650       191,770       3 %
Gross profit
  $ 642,437     $ 871,141     $ (228,704 )     (26 )%
                                 
Refining Segment
                               
Total revenue
  $ 24,048,009     $ 6,616,637     $ 17,431,372       263 %
Total cost of revenue
  $ 22,657,905     $ 6,669,171       (15,988,734 )     (240 )%
Gross profit
  $ 1,390,104     $ (52,534 )   $ 1,442,638       2,746 %
 

 
 
11

 
Our revenues and cost of revenues are significantly impacted by fluctuations in commodity prices; decreases in commodity prices typically result in decreases in revenue and cost of revenues.  Our gross profit is to a large extent a function of the market discount we are able to obtain in purchasing feedstock, as well as how efficiently management conducts operations.

Total revenues increased 128% for the third quarter of 2011, compared to the same period in 2010, due to increases in volume and commodity prices during the third quarter of 2011, compared to the third quarter of 2010.  The average posting (U.S. Gulfcoast Residual Fuel No. 6 3%) for the three months ended September 30, 2011 increased $31.85 per barrel from a three month average of $66.64 per barrel during the 2010 period to $98.49 per barrel during the 2011 period.  On average, prices we received for our products increased 45% for the quarter ended September 30, 2011, compared to the prior year’s quarter, resulting in a $17 million increase in revenue.
 
Our overall volume increased 36% for the three months ended September 30, 2011, and our per barrel margin increased approximately 83% from the three months ended September 30, 2010.  This increase was a result of utilizing more Black Oil in the contracted TCEP process, as well as increased volumes in most of the products we manage.
 
Our Refining and Marketing division experienced an increase in production of 419% for its fuel oil cutter product for the three months ended September 30, 2011, compared to the same period in 2010.  During the 2010 period, TCEP was not producing product and therefore did not contribute any volumes during the three months ended September 30, 2010.  In addition, commodity prices increased approximately 46% for the three months ended September 30, 2011, compared to the same period in 2010. The average posting (U.S. Gulfcoast No. 2 Waterborne) for the three months ended September 30, 2011 increased $39.38 per barrel from a three month average of $84.78 per barrel during the three months ended September 30, 2010 to $124.16 per barrel during the three months ended September 30, 2011.   
 
The contracted TCEP technology generated revenues of $14,856,487 during the three months ended September 30, 2011, with cost of revenues of $14,360,103, producing a gross profit of $496,384.  Due to the Company having the rights to license the use of the technology, its income from operations has been positively affected for the three months ended September 30, 2011.  We currently operate this technology from Vertex LP pursuant to a perpetual license as described above under “Operating and Licensing Agreement.
 
Our Pygas production decreased 58% for the three months ended September 30, 2011, compared to the same period in 2010 and commodity prices increased approximately 41% for our finished Pygas product for the three month period ended September 30, 2011, compared to the same period in 2010.
 
Our gasoline blendstock volumes increased 48% for the three months ended September 30, 2011 as compared to the same period in 2010.  The overall increase in revenues associated with our Refining and Marketing division for the three months ended September 30, 2011, compared to the three months ended September 30, 2010, was due to substantial increases in volume coupled with increased market prices.  Overall volume for the Refining and Marketing division increased 135% during the three month period ended September 30, 2011 as compared to the same period in 2010.  Margin per barrel increased substantially as a result of improved costs for our TCEP operation as well as improved market conditions for the three months ended September 30 2011, compared to the three months ended September 30, 2010.
 
 
12

 
The following table sets forth the high and low spot prices during the first nine months of 2010 for our key benchmarks.

Benchmark
 
High
 
Date
 
Low
 
Date
U.S. Gulfcoast No. 2 Waterborne (dollars per gallon)
  $ 2.29  
May 3
  $ 1.84  
February 8
U.S. Gulfcoast Unleaded 87 Waterborne (dollars per gallon)
  $ 2.40  
May 3
  $ 1.86  
February 8
U.S. Gulfcoast Residual Fuel No. 6 3% (dollars per barrel)
  $ 75.70  
January 6
  $ 60.55  
May 25
NYMEX Crude oil (dollars per barrel)
  $ 86.84  
April 6
  $ 68.01  
May 20
Reported in Platt's US Marketscan (Gulf Coast)
                   

The following table sets forth the high and low spot prices during the first nine months of 2011 for our key benchmarks.
 
Benchmark
 
High
 
Date
 
Low
 
Date
U.S. Gulfcoast No. 2 Waterborne (dollars per gallon)
  $ 3.30  
April 8
  $ 2.44  
January 4
U.S. Gulfcoast Unleaded 87 Waterborne (dollars per gallon)
  $ 3.52  
May 9
  $ 2.33  
January 25
U.S. Gulfcoast Residual Fuel No. 6 3% (dollars per barrel)
  $ 104.35  
April 8
  $ 76.70  
January 4
NYMEX Crude oil (dollars per barrel)
  $ 113.93  
April 29
  $ 79.20  
September 3
 Reported in Platt's US Marketscan (Gulf Coast)
                   

We have seen a consistent increase in each of the benchmark commodities we track through September 2011.
 
Our margins are a function of the difference between what we are able to pay for raw materials and the market prices for the range of products produced.  The various petroleum products produced are typically a function of Crude Oil indices and are quoted on multiple exchanges such as the New York Mercantile Exchange (“NYMEX”).  These prices are determined by a global market and are subject to external factors over which the Company has no control, including but not limited to supply/demand, weather, politics, and global/regional inventory levels.  As such, we cannot provide any assurances regarding results of operations for any future periods, as numerous factors outside of our control affect the prices paid for raw materials and the prices (for the most part keyed to the NYMEX) that can be charged for such products.  Additionally, for the near term, results of operations will be subject to further uncertainty, as the global markets and exchanges, including the NYMEX, continue to experience volatility.
 
            During the three months ended September 30, 2011, gross profit increased 148% from the same period in 2010, primarily due to increases in commodity prices, increases in volumes sold or re-refined through the contracted TCEP, along with reduced costs related to the contracted TCEP process.
 
We had selling, general and administrative expenses of $997,723 for the three months ended September 30, 2011, compared to $667,339 from the prior year’s period, an increase of $330,384 or 50% from the prior period, due to increases in accounting, legal, and payroll costs as well as increased marketing and investor relations expenses from the prior period.
 
We had net income of $1,028,225 for the three months ended September 30, 2011, compared to net income of $208,580 for the three months ended September 30, 2010, an increase in net income of $819,645 or 393% from the prior year’s period.  The increase in net income was mainly due to increased volumes, increased commodity prices as well as an overall increased per barrel margin for the products we sell.   A 128% increase in revenues and a 148% increase in gross profit was offset by the 50% increase in selling, general and administrative expenses incurred during the period ended September 30, 2011, compared to the three months ended September 30, 2010.
 
 
13

 
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2010
 
Set forth below are our results of operations for the nine months ended September 30, 2011, as compared to the same period in 2010.  In the comparative tables below, increases in revenue/income or decreases in expense (favorable variances) are shown without parentheses while decreases in revenue/income or increases in expense (unfavorable variances) are shown with parentheses in the “$ Change” and “% Change” columns.
 
   
Nine Months Ended September 30,
             
   
2011
   
2010
   
$ Change
   
% Change
 
   
(unaudited)
             
Total Revenues
  $ 78,401,089     $ 42,434,319     $ 35,966,770       85 %
                                 
Cost of Revenues
    71,632,067       39,679,178       (31,952,889 )     (81 )%
                                 
Gross Profit
    6,769,022       2,755,141       4,013,881       146 %
                                 
Selling, general and administrative expenses
    3,030,461       2,118,708       (911,753 )     (43 )%
                                 
Income (loss) from operations
    3,738,561       636,433       3,102,128       487 %
                                 
Other Income
    -       219,333       (219,333 )     (100 %)
Interest Expense
    (57,811 )     (89,119 )     31,308       35 %
Income Tax
    (45,689 )     (5,500 )     (40,189 )     (731 )%
                                 
Net income
  $ 3,635,061     $ 761,147     $ 2,873,914       378 %

Each of our segments’ gross profit during the nine months ended September 30, 2011 and 2010 was as follows (increases in revenue and/or decreases in cost of revenues are shown without parentheses while decreases in revenue and/or increases in cost of revenues are shown with parentheses in the “$ Change” and “% Change” columns):
 
   
Nine Months Ended September 30,
             
   
2011
   
2010
   
$ Change
   
$ Change
 
   
(unaudited)
             
Black Oil Segment
                       
Total revenue
  $ 15,101,466     $ 14,726,733     $ 374,733       3 %
Total cost of revenue
  $ 13,633,621     $ 13,030,818       (602,803 )     (5 )%
Gross profit
  $ 1,467,845     $ 1,695,915     $ (228,070 )     (13 )%
                                 
Refining Segment
                               
Total revenue
  $ 63,299,623     $ 27,707,586     $ 35,592,037       128 %
Total cost of revenue
  $ 57,998,446     $ 26,648,360       (31,350,086 )     (118 )%
Gross profit
  $ 5,301,177     $ 1,059,226     $ 4,241,951       (400 )%
 

 
 
14

 
Our revenues and cost of revenues are significantly impacted by fluctuations in commodity prices; decreases in commodity prices typically result in decreases in revenue and cost of revenues.  Our gross profit is to a large extent a function of the market discount we are able to obtain in purchasing feedstock, as well as how efficiently management conducts operations.

Total revenues increased 85% during the nine month period ended September 30, 2011, compared to the same period in 2010, largely due to increases in volume and commodity prices for the nine months ended September 30, 2011, compared to the nine months ended September 30, 2010.  The average posting (U.S. Gulfcoast Residual Fuel No. 6 3%) for the nine months ended September 30, 2011 increased $26.19 per barrel from a nine month average of $68.61 per barrel during the 2010 period to $94.80 per barrel during the 2011 period.  On average, prices we received for our products increased 38% for the nine month period ended September 30, 2011, compared to the same period during 2010 which resulted in a $35.9 million increase in revenue.
 
Overall volumes increased 21% during the nine month period ended September 30, 2011, compared to the prior year’s period.  This increase was a result of utilizing more Black Oil in the contracted TCEP process.  Volume for our Black Oil division declined 25% for the nine months ended September 30, 2011, compared to the same period in 2010, largely due to the increased volume of black oil processed through our TCEP technology.
 
Our per barrel margin increased approximately 103% for the nine months ended September 30, 2011, compared to the nine months ended September 30, 2010.  The increased margin was a result of increased commodity pricing, as well as the lower processing costs associated with the additional volume being run through the TCEP process which helped to lower the overall per barrel cost to process for the period.
 
Our Refining and Marketing division experienced an increase in production of 87% for its fuel oil cutter product for the nine months ended September 30, 2011, compared to the same period in 2010, and commodity price increases of approximately 43% for the same period. The average posting (U.S. Gulfcoast No. 2 Waterborne) for the nine months ended September 30, 2011 increased $37.12 per barrel from a nine month average of $85.38 per barrel during the nine months ended September 30, 2010 to $122.50 per barrel during the nine months ended September 30, 2011.   
 
The TCEP Technology generated revenues of $36,065,435 during the nine months ended September 30, 2011, with cost of revenues of $34,306,136, producing a gross profit of $1,759,299.  Due to the Company having the rights to license the use of the technology, its income from operations has been positively affected for the nine months ended September 30, 2011. The Company’s current operations for the period ended September 30, 2011 would have been negatively impacted if the Company were unable to use the licensing agreement.
 
Therefore, if the Company were not able to use the CMT facilities moving forward, the Company would be negatively impacted by its ability to compete in the marketplace, as it believes that in order to compete with its competitors, it may need the CMT facilities to produce higher valued products from Black Oil streams.  Additionally, as our competitors bring new technologies to the marketplace, which will likely enable them to obtain higher values for the finished products created through their technologies from purchased black oil feedstock, they will be able to pay more for feedstock due to the additional value received from their finished product (i.e., as their margins increase, they are able to increase the prices they are willing to pay for feedstock).  If CMT is not able to continue to refine the technology and gain efficiencies in their TCEP process, we could be negatively impacted by the ability of our competitors to bring new processes to market which compete with our processes as well as their ability to outbid us for feedstock supplies.

If we are unable to effectively compete with additional technologies brought to market by our competitors, our finished products could be worth less and if our competitors are willing to pay more for feedstock than we are, they could drive up prices, which would cause our revenues to decrease, and cause our cost of sales to increase, respectively.  Additionally, if we are forced to pay more for feedstock, our cash flows will be negatively impacted and our margins will decrease.

 
15

 
The Company believes that the enhancements to the TCEP are substantially complete and we will continue to see positive results of operations from such enhancements moving forward.

Our Pygas production decreased 35% for the nine months ended September 30, 2011, compared to the same period in 2010 and commodity prices increased approximately 38% for our finished Pygas product for the nine month period ended September 30, 2011, compared to the same period in 2010.
 
Our gasoline blendstock volumes increased 80% for the nine months ended September 30, 2011 as compared to the same period in 2010.  The overall increase in revenues associated with our Refining and Marketing division for the nine months ended September 30, 2011, compared to the nine month period ended September 30, 2010, was due to small increases in volume coupled with increased market prices.  Overall volume for the Refining and Marketing division increased 56% during the nine month period ended September 30, 2011 as compared to the same period in 2010.  Margin per barrel increased substantially as a result of improved costs for our TCEP operation as well as improved market conditions for the nine months ended September 30, 2011, compared to the nine months ended September 30, 2010.
 
During the nine months ended September 30, 2011, gross profit increased 146% from the same period in 2010, primarily due to increases in volumes, increases in commodity pricing, and increased production of our TCEP product during the nine month period ended September 30, 2011 as compared to the nine months ended September 30, 2010.
 
We had selling, general and administrative expenses of $3,030,461 for the nine months ended September 30, 2011, compared to $2,118,708 from the prior year’s period, an increase of $911,753 or 43% from the prior period. This increase is primarily due to increases in accounting, legal, and payroll costs as well as increased marketing and investor relations expenses associated with being a public company.
 
We had net income of $3,635,061 for the nine months ended September 30, 2011, compared to net income of $761,147 for the nine months ended September 30, 2010, an increase in net income of $2,873,914 or 378% from the prior year’s period.  The increase in net income was mainly due to an 85% increase in revenue, which was offset by an 81% increase in cost of revenues which was less than the overall increase in revenues due to improvements in the margins of our products and resulted in a 146% increase in gross profit.
 
Liquidity and Capital Resources
 
The success of our current business operations is not dependent on extensive capital expenditures, but rather on relationships with feedstock suppliers and end-product customers, and on efficient management of overhead costs.   However, we may incur future capital expenditures related to new TCEP facilities. Through these relationships, we have historically been able to achieve volume discounts in the procurement of our feedstock, thereby increasing the margins of our segments’ operations.  The resulting operating cash flow is crucial to the viability and growth of our existing business lines.
 
We had total assets of $17,813,897 as of September 30, 2011 compared to $8,139,345 at December 31, 2010.  This increase was partially due to $3,635,061 of net income which was generated during the nine months ended September 30, 2011 as well as the $4,864,249 increase in inventory as of September 30, 2011, compared to December 30, 2010, along with the increase in our accounts receivable of $4,010,965 between September 30, 2011 and December 31, 2010 and the $572,864 increase in cash and cash equivalents between September 30, 2011 and December 31, 2010. The increase in accounts receivable and inventory is partly due to commodity pricing which increases the carrying value of our inventory as well as timing of our sales.  In addition there was a $124,001 increase in the net value of the license for the TCEP technology (due to increased expenditures on such process offset by amortization on such asset), described below, all of which attributed to the increase in total assets as of September 30, 2011, compared to December 31, 2010.
 
 
16

 
Total current assets as of September 30, 2011 of $15,699,515 consisted of cash and cash equivalents of $1,317,177, accounts receivable, net, of $5,493,475 accounts receivable-related party of $10,967 (representing funds due from Vertex Recovery which entity is described in greater detail under “Certain relationships and related Transactions, and Director Independence” in the Company’s Form 10-K for the year ended December 31, 2010), inventory of $8,766,030, and prepaid expenses of $111,866.  Long term assets consisted of fixed assets, net, of $156,415, and a licensing agreement in the net amount of $1,957,967, which represents the value of the Company’s licensing agreement for the use of the thermal chemical extraction technology, net of amortization.  As of September 30, 2011, an additional $852,118 of development investments have been made to the TCEP and added to the original $1.4 million license value. The Company has fully paid CMT for the license for the TCEP as of the date of this filing.  Our cash, accounts receivable, inventory and accounts payable fluctuate and are somewhat tied to one another based on the timing of our inventory cycles and sales.
 
We had total liabilities of $10,639,356 as of September 30, 2011, compared to $5,600,472 at December 31, 2010.  This increase was largely due to the increase in commodity prices during the nine months ended September 30, 2011, which in turn increased the cost of the products we purchase and contributed to the increase in accounts payable and accrued expenses of $2,872,639 as of September 30, 2011, compared to December 31, 2010.  At September 30, 2011, current liabilities consisted of accounts payable of $7,465,838, accounts payable – related parties of $1,093,241, deposits of $1,080,277, and $1,000,000 of line of credit, representing amounts drawn down on the Line of Credit, as described below.  Accounts payable – related parties included amounts payable to CMT, H&H Oil Baytown, H&H Oil Austin and H&H Oil Corpus, which entities are majority-owned and controlled by our Chief Executive Officer and Chairman Benjamin P. Cowart.

   We had positive working capital of $5,060,159 as of September 30, 2011.  Excluding current liabilities to and current assets relating to related parties our working capital was $6,142,433 as of September 30, 2011.  We had positive working capital of $1,228,617 as of December 31, 2010. Excluding current liabilities to related parties our working capital was $1,635,890 as of December 31, 2010.  The $3,831,542 improvement in working capital from December 31, 2010 to September 30, 2011 is due to the net income of $3,635,061 which we generated for the nine months ended September 30, 2011, the increased inventory of $4,864,249 (which increased total current assets), as well as the increase in our accounts receivable of $4,010,965 as of September 30, 2011, compared to December 31, 2010, offset by the increase of $2,872,639 in accounts payable and accrued expenses.
 
Our future operating cash flows will vary based on a number of factors, many of which are beyond our control, including commodity prices, the cost of recovered oil, and the ability to turn our inventory.  Other factors that have affected and are expected to continue to affect earnings and cash flow are transportation, processing, and storage costs.  Over the long term, our operating cash flows will also be impacted by our ability to effectively manage our administrative and operating costs.
 
In September 2010, the Company entered into a loan agreement with Bank of America Merrill Lynch (“Bank of America”). Prior to entering into the loan agreement, the Company satisfied in full all of its prior obligations owing to Regions Bank (“Regions”) under the revolving line of credit agreement entered into in June 2009 and amended on May 25, 2010, which had an outstanding balance of $1,300,000 on June 30, 2010, and terminated such line of credit agreement. Regions released all of its previously held security agreements and financing statements.

Pursuant to the loan agreement, Bank of America agreed to loan up to $3,500,000 in the form of a revolving line of credit, which is expected to be used for feedstock purchases and general corporate purposes. The line of credit bears interest at the Bank of America LIBOR rate plus 3%, adjusted daily, and is due on September 16, 2011.  On September 22, 2011, Bank of America provided an extension through December 31, 2011 on the Line of Credit.   As of September 30, 2011, there was a $1,000,000 balance due on the Line of Credit, of which there was $2,350,000 available (based on the criteria set forth in the line of credit).  As of the filing of this Report, a total of $0 was drawn on the Line of Credit leaving an available balance for draw downs of $3,350,000.

 
17

 
The financing arrangement discussed above is secured by all of the assets of the Company.  The management of the Company believes that with the financing arrangement, in addition to projected earnings, it will have sufficient liquidity to fund the Company’s operations for the foreseeable future, although it may seek additional financing to fund acquisitions or other development in the future.

In October 2010, we entered into a Sales Agreement, pursuant to which we agreed to purchase approximately 400,000 to 600,000 gallons of raw pyronaptha per month at a variable price per gallon formula, based on the prior week’s market prices of certain market indexes, for a term beginning on October 1, 2010 and ending on September 30, 2011. The agreement required the Company to provide a standby letter of credit in the amount of $900,000, which as extended expires on November 30, 2011. To date there have been no draws against the letter of credit.  This letter of credit reduces the amount of available balance under the line of credit.  During the nine months ended September 30, 2011, the required amount of the standby letter of credit was reduced to $150,000.
 
Our re-refining business will require significant capital to design and construct any new facilities other than the existing facility in Baytown, Texas, owned by CMT.  We have the right to use the existing facility in Baytown, Texas, pursuant to an Operating Agreement with CMT described above. We currently estimate that the cost to construct a new, fully functional full-scale commercial process at another location would be approximately $2.5 to $5.0 million, based on throughput capacity.  The facility infrastructure would be an additional capitalized expenditure to these proposed process costs and would depend on the location and site specifics of the facility.
 
We believe that cash from ongoing operations and our working capital facility will be sufficient to satisfy our existing cash requirements.   However, in order to implement our growth strategy, and pay our outstanding debts (as described above) we may need to secure additional financing in the future.
 
Additionally, as part of our ongoing efforts to maintain a capital structure that is closely aligned with what we believe to be the potential of our business and future growth, which is subject to cyclical changes in commodity prices, we will be exploring additional sources of external liquidity.  The receptiveness of the capital markets to an offering of debt or equities cannot be assured and may be negatively impacted by, among other things, debt maturities, current market conditions, and potential stockholder dilution. The sale of additional securities, if undertaken by the Company and if accomplished, may result in dilution to our shareholders. We cannot assure you, however, that future financing will be available in amounts or on terms acceptable to us, or at all.
 
There is currently only a limited market for our common stock, and as such, we anticipate that such market will be illiquid, sporadic and subject to wide fluctuations in response to several factors moving forward, including, but not limited to:

(1)
actual or anticipated variations in our results of operations;
   
(2)
our ability or inability to generate new revenues; and 
   
(3)
the number of shares in our public float.

Furthermore, because our common stock is traded on the OTCBB, our stock price may be impacted by factors that are unrelated or disproportionate to our operating performance. These market fluctuations, as well as general economic, political and market conditions, such as recessions, interest rates or international currency fluctuations may adversely affect the market price of our common stock. Additionally, at present, we have a limited number of shares in our public float, and as a result, there could be extreme fluctuations in the price of our common stock.  The total number of shares of common stock outstanding as of the date of this report was 9,391,084 shares, and approximately 6.7 million of these shares are subject to Lock-up Agreements.  The Lock-up Agreements provide that until three years following the effective date of the Merger (the “Lock-Up Period”), shareholders subject to the Lock-Up Agreements cannot sell, assign, pledge or otherwise transfer any shares of common stock such holders beneficially own, without the Company's prior written consent.  Notwithstanding the foregoing, the Lock-up Agreements provide that the holders may transfer (i) all or any portion of the shares subject to the Lock-up Agreements commencing on the date that the closing price of our common stock has averaged at least $15.00 per share over a period of 20 consecutive trading days and the daily trading volume over the same 20-day period has averaged at least 7,500 shares; (ii) all or any portion of the shares as a bona fide gift or gifts, provided that the donee or donees thereof agree to be bound by the restrictions set forth in the Lock-up Agreement, (iii) all or any portion of the shares to any trust for the direct or indirect benefit of the holder or the immediate family of the holder, provided that the trustee of the trust agrees to be bound by the restrictions set forth in the Lock-up Agreement, and provided further that any such transfer shall not involve a disposition for value, and (iv) in any given three-month period commencing on the one-year anniversary of the effective date of the Merger, up to that number of shares equal to 5% of the total number of shares then beneficially owned by such holder.  The Lock-Up Period expires and the shareholders are able to freely trade the shares they hold without any contractual restriction on such shares on April 16, 2012.

 
18

 
Additionally, the Company has approximately 4.4 million shares of Series A Convertible Preferred Stock (“Series A Preferred Stock”) issued and outstanding as of the date of this report.  Among the other rights of the Series A Preferred Stock, each share of Series A Preferred Stock can be converted into one (1) share of common stock, provided that prior to the three-year anniversary of the Merger (April 16, 2012), no holder may, in any given three-month period, convert more than that number of shares of Series A Preferred Stock that equals 5% of the total number of shares of Series A Preferred Stock then beneficially owned by such holder (the “Conversion Limitation”).  Additionally, holders may convert only up to that number of shares of Series A Preferred Stock, such that upon conversion, the aggregate beneficial ownership of the Company’s common stock held by any such holder does not exceed 4.99% of the Company’s common stock then outstanding (the “Beneficial Limitation”). 

We believe that our stock prices (bid, ask and closing prices) may be entirely arbitrary, may not relate to the actual value of the Company, and may not reflect the actual value of our common stock (and may reflect a lower value). Shareholders and potential investors in our common stock should exercise caution before making an investment in the Company, and should not rely on the publicly quoted or traded stock prices in determining our common stock value, but should instead determine the value of our common stock based on the information contained in the Company's public reports, industry information, and those business valuation methods commonly used to value private companies.

We may seek to explore the listing of our common stock on the NASDAQ, NYSE, or AMEX exchanges or another national securities exchange in the future.  We believe that the listing of our securities on a national exchange will facilitate the Company’s access to capital, from which certain acquisitions and capital investments might be financed.    Until meeting the listing requirements of a national securities exchange and our Board of Directors determining such listing is in our best interests, we expect that our common stock will continue to be eligible to trade on the OTCQB and OTCBB, or on the "pink sheets," where our stockholders may find it more difficult to dispose of shares or obtain accurate quotations as to the market value of our common stock.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
19

 

Cash flows for the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010

   
Nine Months Ended September 30,
 
   
2011
   
2010
 
   
(unaudited)
 
Beginning cash and cash equivalents
  $ 744,313     $ 514,136  
                 
Net cash provided by (used in):
               
Operating activities
    (409,121 )     15,367  
Investing activities
    (324,265 )     (269,054 )
Financing activities
    1,306,250       758,178  
                 
Net increase in cash and cash equivalents
    572,864       504,491  
                 
Ending cash and cash equivalents
  $ 1,317,177     $ 1,018,627  

Operating activities used cash of $409,121 for the nine months ended September 30, 2011 as compared to providing $15,367 of cash during the corresponding period in 2010.  Our primary sources of liquidity are cash flows from our operations and the availability to borrow funds under our line of credit with Bank of America, as described above.  The primary reasons for the decrease in cash provided by operating activities are related to the $4,864,249 increase in inventory and $4,010,965 increase in accounts receivable, for the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010, offset by a $2,872,639 increase in accounts payable, a $685,968 increase in accounts payable related parties, and a $1,080,277 increase in other deposits, as well as net income of $3,635,061.  Additionally, non-cash expense related to stock compensation expense (associated with the vesting of previously granted options to management) provided $94,358 of liquidity for the nine months ended September 30, 2011 and depreciation and amortization contributed $120,138 of net cash.
 
Investing activities used cash of $324,265 for the nine months ended September 30, 2011 as compared to having used $269,054 of cash during the corresponding period in 2010.  Investing activities for the nine months ended September 30, 2011 are comprised of $232,214 in cash payments related to the license of the TCEP and $92,051 of purchase of fixed assets.
 
Financing activities provided $1,306,250 during the nine months ended September 30, 2011 resulting from $306,250 of proceeds from the exercise of common stock warrants and $1,000,000 drawn down on the Line of Credit with Bank of America.
 
In January 2010, the Company began a private placement offering to accredited investors only of up to 2,000,000 units (the “Series B Offering”), each consisting of (a) one share of Series B Preferred Stock; and (b) one three year warrant to purchase one share of common stock of the Company at an exercise price of $2.00 per share (each a “Unit”) , which offering has since closed.  We also agreed to grant investors in the offering piggy-back registration rights in connection with the shares of common stock issuable in connection with the conversion of the Series B Preferred Stock and the shares of common stock underlying the exercise of the warrants sold in the Series B Offering for eighteen months following the date of the sale of each of the Units; provided that all of such rights have expired or been waived by such investors to date. The shares of Series B Preferred Stock are convertible at the option of the holder into shares of our common stock at the rate of one for one, automatically convert into common stock if our common stock trades for at least ten consecutive trading days over $2.00 per share, accrue quarterly dividends at the rate of 12% per annum, and are required to be redeemed by the Company, if not converted prior to such redemption date, on the third anniversary of the issuance date of such shares at a redemption rate of $1.00 per share. The dividends are recorded as interest expense, due to the preferred stock being classified as a liability.
 
 
 
20

 

From February to May 2010, the Company sold 600,000 Units and raised $600,000 in connection with the Series B Offering.  These 600,000 shares of Series B Preferred Stock were issued and outstanding until June 15, 2011 at which point they were converted into common stock as described below.

The Mandatory Conversion provision of the Series B Convertible Preferred stock provided that if the closing sales price of the Company’s common stock was equal to or greater than $2.00 per share for a period of ten (10) consecutive trading days (as occurred between June 2 and June 15, 2011), each share of Series B Stock, without any required action by any holder of such Series B Stock, automatically converts into one (1) share of common stock of the Company (the “Automatic Conversion”).  In connection with the Automatic Conversion, each Series B Stock was automatically converted into common stock effective June 15, 2011, and such Series B Stock and all rights thereunder were automatically terminated and cancelled.
 
Net Operating Losses
 
We intend to take advantage of any potential tax benefits related to net operating losses (“NOLs”) acquired as part of the World Waste merger.  As a result of the merger we acquired approximately $42 million of net operating losses that may be used to offset taxable income generated by the Company in future periods.
 
It is possible that the Company may be unable to use these NOLs in their entirety.  The extent to which the Company will be able to utilize these carry-forwards in future periods is subject to limitations based on a number of factors, including the number of shares issued within a three-year look-back period, whether the merger is deemed to be a change in control, whether there is deemed to be a continuity of World Waste’s historical business, and the extent of the Company’s subsequent income. As of December 31, 2010, the Company had utilized $1,616,638 of these NOLs leaving approximately $39.8 million of potential NOLs of which we expect to utilize approximately $3.6 million for the nine months ended September 30, 2011.

Critical Accounting Policies and Use of Estimates
 
Our financial statements are prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Management regularly evaluates its estimates and judgments, including those related to revenue recognition, goodwill, intangible assets, long-lived assets valuation, and legal matters. Actual results may differ from these estimates. (See Note 2 to the financial statements).

The Company evaluates the carrying value and recoverability of its long-lived assets within the provisions of the FASB ASC regarding long-lived assets.  It requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable through the estimated undiscounted cash flows expected to result from the use and eventual disposition of the assets.  Whenever any such impairment exists, an impairment loss will be recognized for the amount by which the carrying value exceeds the fair value.
 
Revenue Recognition.   Revenue for each of the Company’s divisions is recognized when persuasive evidence of an arrangement exists, goods are delivered, sales price is determinable, and collection is reasonably assured. Revenue is recognized upon delivery by truck and railcar of feedstock to its re-refining customers and upon product leaving the Company’s terminal facilities via barge.

Legal Matters.  Accruals are established for legal matters when, in our opinion, it is probable that a liability exists and the liability can be reasonably estimated. Actual expenses incurred in future periods can differ materially from accruals established.
 
 
21

 
Stock Based Compensation
 
The Company accounts for share-based expense and activity in accordance with FASB ASC Topic 718, which establishes accounting for equity instruments exchanged for services. Under this provision share-based compensation costs are measured at the grant date, based on the calculated fair value of the award, and are recognized as an expense over the employee’s requisite service period, generally the vesting period of the equity grant.
 
Share-based payments to non-employees are measured at the grant date, based on the calculated fair value of the award, and are recognized as an expense over the service period, generally the vesting period of the equity grant. The Company estimates the fair value of stock options using the Black-Scholes valuation model. Key input assumptions used to estimate the fair value of stock options include the exercise price of the award, expected option term, expected volatility of the stock over the option’s expected term, risk-free interest rate over the option’s expected term, and the expected annual dividend yield. The Company believes that the valuation technique and approach utilized to develop the underlying assumptions are appropriate in calculating the fair values of the stock options granted.
   
Basic and Diluted Loss per Share
 
Basic and diluted loss per share has been calculated based on the weighted average number of shares of common stock outstanding during the period.
 
License Agreement Development Costs

The Company capitalizes costs to improve any acquired intangible asset which is specifically identifiable, and has a definite life. All other costs are expensed as incurred.

Income Taxes
 
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.
 
Recently Issued Accounting Pronouncements

Management does not expect the impact of any recently issued accounting pronouncements to have a material impact on its financial condition or results of operations.

Market Risk

Our revenues and cost of revenues are affected by fluctuations in the value of energy related products.  We attempt to mitigate much of the risk associated with the volatility of relevant commodity prices by using our knowledge of the market to obtain feedstock at attractive costs, by efficiently managing the logistics associated with our products, by turning our inventory over quickly, and by selling our products into markets where we believe we can achieve the greatest value.  We believe that the current downward trend in natural gas prices coupled with increasing crude oil prices provides an attractive margin opportunity for our TCEP.

 
22

 
Item 3. Quantitative and Qualitative Disclosures about Market Risk

Pursuant to Item 305(e) of Regulation S-K (§ 229.305(e)), the Company is not required to provide the information required by this Item as it is a “smaller reporting company,” as defined by Rule 229.10(f)(1).

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Principal Executive Officer and Principal Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this Quarterly Report on Form 10-Q. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Based on our evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
 
 
Changes in Internal Control Over Financial Reporting

We regularly review our system of internal control over financial reporting to ensure we maintain an effective internal control environment. There were no changes in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
 
 
 
 
 
23

 
Part II. OTHER INFORMATION
 
Item 1. Legal Proceedings

From time to time, we may become party to litigation or other legal proceedings that we consider to be a part of the ordinary course of our business.

On July 28, 2011, Buffalo Marine Service, Inc. (“Buffalo”) filed a complaint against Trafigura AG d/b/a Trafigura AG Inc. (“Trafigura”), KMTEX, Ltd. (“KMTEX”) and the Company in the United States District Court for the Southern District of Texas (Civil Action No. 4:11-cv-02544).

The complaint alleged that certain maritime liquid cargo transported by Buffalo (as operator of barges) was contaminated by Trafigura (who purchased products from the Company which were then transported on Buffalo’s barges) and /or KMTEX (who processes the Company's products) and/or the Company (who sold certain products to Trafigura which were then transported on Buffalo’s barges).  The causes of actions set forth in the complaint included Breach of Contract against Trafigura, Breach of Warranty against Trafigura, KMTEX and the Company, and Negligence/Gross Negligence by Trafigura, KMTEX (who processes the Company’s products), and the Company.
 
The total amount of damages claimed by Buffalo is not currently known.  The Company has engaged legal counsel in the matter and filed an answer to the complaint denying Buffalo’s allegations.  We intend to vigorously defend ourselves against Buffalo’s claims; however, at this stage of the litigation the outcome cannot be predicted with any degree of reasonable certainty.

We are not currently involved in legal proceedings, other than the complaint described above, that could reasonably be expected to have a material adverse effect on our business, prospects, financial condition or results of operations other than as described above. We may become involved in material legal proceedings in the future.

Item 1A. Risk Factors

There have been no material changes from the risk factors previously disclosed in the Company’s Annual Report on Form 10-K, filed with the Commission on March 31, 2011 and investors are encouraged to review such risk factors prior to making an investment in the Company.

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

During the three months ended September 30, 2011 a total of 127,994 shares of the Company's Series A Preferred Stock were converted into 127,994 shares of our common stock on a one for one basis.  In addition, one employee of the Company exercised their options for the issuance of 5,000 shares of our common stock in consideration for $2,250.

Subsequent to the three months ended September 30, 2011, a total of 1,686 shares of the Company's Series A Preferred Stock were converted into 1,686 shares of our common stock on a one for one basis.

Subsequent to the three months ended September 30, 2011, one of the holders of warrants granted in connection with the Company's Offering of Units (consisting of the Series B Preferred Stock and warrants to purchase shares of the Company's common stock at an exercise price of $2.00 per share), exercised warrants to purchase 150,000 shares in consideration for $300,000 and was issued 150,000 shares of common stock.

We claim an exemption from registration afforded by Section 3(a)(9) of the Securities Act of 1933, as amended (the “Act”), for the above conversions, as the securities were exchanged by the Company with its existing security holders exclusively in transactions where no commission or other remuneration was paid or given directly or indirectly for soliciting such exchange and Section 4(2) of the Act for the exercises, since the issuances did not involve a public offering, the recipients took the securities for investment and not resale and we took appropriate measures to restrict transfer.

 
24

 
Item 3.     Defaults Upon Senior Securities

None.

Item 4.    (Removed and Reserved)

Item 5.    Other Information.

None.

Item 6.    Exhibits

 
EXHIBIT NO.
DESCRIPTION
2.1(7)
Amended and Restated Agreement and Plan of Merger by and among World Waste Technologies, Inc., Vertex Holdings, L.P. (formerly Vertex Energy, L.P.), Vertex Energy, Inc., Vertex Merger Sub, LLC and Benjamin P. Cowart
   
2.2(7)
Amendment No. 1, dated December 2008, to Amended and Restated Agreement and Plan of Merger by and among World Waste Technologies, Inc., Vertex Holdings, L.P. (formerly Vertex Energy, L.P.), Vertex Energy, Inc., Vertex Merger Sub, LLC and Benjamin P. Cowart
   
2.3(7)
Amendment No. 2, dated December 2008, to Amended and Restated Agreement and Plan of Merger by and among World Waste Technologies, Inc., Vertex Holdings, L.P. (formerly Vertex Energy, L.P.), Vertex Energy, Inc., Vertex Merger Sub, LLC and Benjamin P. Cowart
   
2.4(7)
Amendment No. 3, dated January 28, 2009, to Amended and Restated Agreement and Plan of Merger by and among World Waste Technologies, Inc., Vertex Holdings, L.P. (formerly Vertex Energy, L.P.), Vertex Energy, Inc., Vertex Merger Sub, LLC and Benjamin P. Cowart
   
2.5(7)
Amendment No. 4, dated February 2, 2009, to Amended and Restated Agreement and Plan of Merger by and among World Waste Technologies, Inc., Vertex Holdings, L.P. (formerly Vertex Energy, L.P.), Vertex Energy, Inc., Vertex Merger Sub, LLC and Benjamin P. Cowart
   
2.6(1)
Amendment No. 5, dated as of March 31, 2009, to Amended and Restated Agreement and Plan of Merger by and among World Waste Technologies, Inc., Vertex Holdings, L.P. (formerly Vertex Energy, L.P.), Vertex Energy, Inc., Vertex Merger Sub, LLC and Benjamin P. Cowart.
   
3.1(2)
Articles of Incorporation (and amendments thereto) of Vertex Energy, Inc.
   
3.2(5)
Amended and Restated Certificate of Designation of Rights, Preferences and Privileges of Vertex Energy, Inc.'s Series A Convertible Preferred Stock.
   
3.3(2)
Withdrawal of Designation of the Company’s Series B Preferred Stock
   
3.4(4)
Series B Convertible Preferred Stock Filing
 
 
 
 
25

 
 
 
   
3.5(2)
Bylaws of Vertex Energy, Inc.
   
4.1(2)
Vertex Energy, Inc., 2008 Stock Incentive Plan
   
4.2(3)
2009 Stock Incentive Plan of Vertex Energy, Inc.
   
10.1(2)
Asset Transfer Agreement
   
10.2(2)
Services Agreement
   
10.3(2)
Right of First Refusal Agreement
   
10.4(2)
Operating and Licensing Agreement
   
10.5(2)
Employment Agreement with Benjamin P. Cowart
   
10.6(2)
Employment Agreement with John Pimentel
 
10.7(2)
Employment Agreement with Matthew Lieb
   
10.8(2)
Letter Loan Agreement with Regions Bank
   
10.9(2)
Line of Credit with Regions Bank
   
10.10(2)
Security Agreement with Regions Bank
   
10.11(3)
Letter Agreement with Christopher Stratton
   
10.12(6)
Loan Agreement with Bank of America
   
10.13(6)
Security Agreement
   
10.14(8)(+)
Tolling (Processing) Agreement with KMTEX
   
10.15(8)(+)
First Amendment to Processing Agreement with KMTEX
   
10.16(8)
Form of Voting Agreement
   
10.17(8)
Form of Lock-Up Agreement
   
10.18(8)
Amended and Restated Employment Agreement with Chris Carlson
   
10.19(8)
First Amendment to Employment Agreement with Benjamin P. Cowart
   
10.20(8)
First Amendment to Employment Agreement with Matt Lieb
   
10.21*
Addendum to The Employment Agreement Between Vertex Energy, Inc. and Greg Wallace (July 5, 2011)
   
14.1(2)
Code of Ethics
   
16.1(2)
Letter from Stonefield Josephson, Inc.
   
21.1(8)
Subsidiaries
   
31.1*
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act.
   
 
 
 
26

 
 
31.2*
Certification of Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act.
   
32.1*
Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
   
32.2*
Certification of Principal Accounting Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
   
99.1(2)
Audited Financial Statements of Vertex Holdings, L.P. formerly Vertex Energy, L.P. (certain assets, liabilities and operations related to its black oil division and certain assets, liabilities and operations of the refining and marketing division) for the years ended December 31, 2008 and 2007
   
99.2(2)
Unaudited Financial Statements of Vertex Holdings, L.P. formerly Vertex Energy, L.P. (certain assets, liabilities and operations related to its black oil division and certain assets, liabilities and operations of the refining and marketing division) for the three months ended March 31, 2009 and 2008
   
99.3(2)
Audited Financial Statements of Vertex Energy, Inc. as of December 31, 2008
   
99.4(2)
Unaudited Interim Financial Statements of Vertex Energy, Inc. for the three months ended March 31, 2009 and 2008
   
99.5(2)
Pro Forma Financial Statements of Vertex Energy, Inc.
   
99.6(2)
Glossary of Selected Terms
   
101.INS**
XBRL Instance Document
   
101.SCH**
XBRL Taxonomy Extension Schema Document
   
101.CAL**
XBRL Taxonomy Extension Calculation Linkbase Document
   
101.DEF**
XBRL Taxonomy Extension Definition Linkbase Document
   
101.LAB**
XBRL Taxonomy Extension Label Linkbase Document
   
101.PRE**
XBRL Taxonomy Extension Presentation Linkbase Document

* Filed herewith.

(1) Filed as an exhibit to the registrant’s Report on Form 8-K, filed with the Commission on April 8, 2009, and incorporated herein by reference.

(2) Filed as an exhibit to the registrant’s Report on Form 8-K/A. filed with the Commission on June 26, 2009, and incorporated herein by reference.

(3) Filed as an exhibit to the registrant’s Report on Form 8-K, filed with the Commission on July 31, 2009, and incorporated herein by reference.

 
27

 
(4) Filed as an exhibit to the registrant’s Report on Form 8-K, filed with the Commission on January 14, 2010, and incorporated herein by reference.

(5) Filed as an exhibit to the registrant’s Report on Form 8-K, filed with the Commission on July 16, 2010, and incorporated herein by reference.

(6) Filed as an exhibit to the registrant’s Report on Form 8-K, filed with the Commission on September 24, 2010, and incorporated herein by reference.

(7) Filed as Appendix A to the Company’s Definitive Schedule 14A Proxy Statement, filed with the Commission on February 6, 2009, and incorporated by reference herein.

(8) Filed as an exhibit to the registrant’s Report on Form 10-K, filed with the Commission on March 31, 2011, and incorporated by reference herein.

(+) Certain portions of these documents as filed herewith (which portions have been replaced by "X's") have been omitted in connection with a request for Confidential Treatment as submitted to the Commission in connection with this filing.   This entire exhibit including the omitted confidential information has been filed separately with the Commission.

** XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

 
 
 
 
 
 

 
 
28

 


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, hereunto duly authorized.

 
VERTEX ENERGY, INC.
   
Date: November 1, 2011
By: /s/ Benjamin P. Cowart
 
Benjamin P. Cowart
 
Chief Executive Officer
 
(Principal Executive Officer)
   
   
Date: November 1, 2011
By: /s/ Chris Carlson
 
Chris Carlson
 
Chief Financial Officer
 
(Principal Financial Officer)

 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
29