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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 JUNE 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
incorporation or organization)
(I.R.S. Employer Identification
No.)
   
1331 GEMINI STREET
SUITE 250
HOUSTON, TEXAS
77058
(Address of principal executive offices)
(Zip Code)
 
Registrant's telephone number, including area code: 866-660-8156
 
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: 9,118,990 shares of common stock issued and outstanding as of August 8, 2011.
 
 
 

 
TABLE OF CONTENTS
 
   
Page
     
PART I
   
     
Item 1.
Consolidated Financial Statements
 
     
 
Consolidated Balance Sheets
F-1
 
Consolidated Statements of Operations (unaudited)
F-2
 
Consolidated Statements of Cash Flows (unaudited)
F-3
 
Notes to Consolidated Financial Statements  (unaudited)
F-4
     
Item 2.
Management’s Discussion And Analysis Of Financial Condition And Results Of Operations
3
     
Item 3.
Quantitative And Qualitative Disclosures About Market Risk
20
     
Item 4.
Controls and Procedures
20
     
     
PART II
   
     
Item 1.
Legal Proceedings
21
     
Item 1A:
Risk Factors
21
     
Item 2.
Unregistered Sales Of Equity Securities And Use Of Proceeds
21
     
Item 3.
Defaults Upon Senior Securities
21
     
Item 4.
(Removed and Reserved)
21
     
Item 5.
Other Information
22
     
Item 6.
Exhibits
22
 
 
 

 
PART I – FINANCIAL INFORMATION

Item 1. Financial Statements
 
VERTEX ENERGY, INC.
 
CONSOLIDATED BALANCE SHEETS
 
   
   
June 30,
   
December 31,
 
   
2011
   
2010
 
   
(unaudited)
       
ASSETS
           
             
Current assets
           
  Cash and cash equivalents
  $ 2,526,326     $ 744,313  
  Accounts receivable, net
    2,113,667       1,482,510  
  Accounts receivable- related party
    3,900       -  
  Inventory
    6,047,649       3,901,781  
  Prepaid expenses
    112,720       100,485  
      Total current assets
    10,804,262       6,229,089  
                 
Noncurrent assets
               
  Licensing agreement, net
    1,957,826       1,833,966  
  Fixed assets, net
    101,129       76,290  
      Total noncurrent assets
    2,058,955       1,910,256  
                 
TOTAL ASSETS
  $ 12,863,217     $ 8,139,345  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
 
               
 Current liabilities
               
   Accounts payable and accrued expenses
  $ 6,083,552     $ 4,593,199  
   Accounts payable-related party
    968,276       407,273  
        Total current liabilities
    7,051,828       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 June 30, 2011 and December 31, 2010 (includes $150,000 to a related party)
    -        600,000  
        Total liabilities
    7,051,828       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 4,580,161 and 4,675,716  issued
    and outstanding at June 30, 2011 and  December 31,
    2010 respectively
         4,581            4,676  
Common stock, $0.001 par value per share;
               
   750,000,000 shares authorized; 9,106,404 and 8,370,849
   issued and outstanding at June 30, 2011 and
   December 31, 2010 respectively
      9,106         8,371  
Additional paid-in capital
    2,940,114       2,275,074  
Retained earnings
    2,857,588       250,752  
      Total stockholders’ equity
    5,811,389       2,538,873  
                 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 12,863,217     $ 8,139,345  
 
See accompanying notes to the consolidated financial statements
 
F-1

 
CONSOLIDATED STATEMENTS OF OPERATIONS
 
THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010
 
(UNAUDITED)
 
             
   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Revenues
  $ 27,790,860     $ 15,867,061     $ 48,081,785     $ 29,140,141  
Revenues – related parties
    -       3,750       17,978       3,750  
      27,790,860       15,870,811       48,099,763       29,143,891  
                                 
Cost of revenues
    25,325,275       14,962,107       43,363,282       27,207,357  
                                 
Gross profit
    2,465,585       908,704       4,736,481       1,936,534  
                                 
 
Selling, general and
   administrative expenses
    1,006,683       700,195         2,032,738       1,451,369  
                                 
Income from operations
    1,458,902       208,509       2,703,743       485,165  
                                 
Other income (expense)
                               
   Other income
    -       100,000       -       130,000  
   Interest expense
    (25,177 )     (25,952 )     (54,218 )     (62,598 )
Total other income (expense)
    (25,177 )     74,048       (54,218 )     67,402  
                                 
Income before income tax
    1,433,725       282,557       2,649,525       552,567  
                                 
Income tax expense
    (22,986 )     -       (42,689 )     -  
                                 
Net income
  $ 1,410,739     $ 282,557     $ 2,606,836     $ 552,567  
                                 
Earnings per common share
                               
     Basic
  $ 0.17     $ 0.03     $ 0.31     $ 0.07  
     Diluted
  $ 0.10     $ 0.02     $ 0.19     $ 0.04  
                                 
Shares used in computing earnings per share
                               
     Basic
    8,535,111       8,258,493       8,487,392       8,256,375  
     Diluted
    13,937,618       13,629,049       13,889,899       13,626,930  
 
See accompanying notes to the consolidated financial statements
 
 
F-2

 
VERTEX ENERGY, INC.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
SIX MONTHS ENDED JUNE 30, 2011 AND 2010
 
(unaudited)
 
       
   
Six Months Ended
 
   
June 30,
2011
   
June 30,
2010
 
 
             
             
Cash flows operating activities
           
  Net income
  $ 2,606,836     $ 552,567  
  Adjustments to reconcile net income to cash
               
  provided by operating activities
               
         Stock based compensation expense
    61,680       101,163  
         Depreciation and amortization
    78,301       70,395  
     Changes in assets and liabilities
               
       Accounts receivable
    (631,157 )     161,998  
       Accounts receivable- related parties
    (3,900 )     (1,250 )
       Inventory
    (2,145,868 )     875,016  
       Prepaid expenses
    (12,235 )     49,691  
       Accounts payable
    1,490,353       (514,950 )
       Accounts payable-related parties
    561,003       (41,393 )
  Net cash provided by operating activities
    2,005,013       1,253,237  
                 
Cash flows from investing activities
               
   Purchase of intangible assets
    (194,726 )     (260,401 )
   Purchase of fixed assets
    (32,274 )     (7,154 )
   Net cash used by investing activities
    (227,000 )     (267,555 )
                 
Cash flows from financing activities
               
  Proceeds from sale of Preferred “B” shares
    -       600,000  
  Proceeds from exercise of common stock warrants
    4,000       33  
  Line of credit proceeds, net
    -       1,300,000  
  Payments on due to related party balance
    -       (841,855 )
  Net cash provided by financing activities
    4,000       1,058,178  
                 
Net increase in cash and cash equivalents
    1,782,013       2,043,860  
                 
Cash and cash equivalents at beginning of the period
    744,313       514,136  
                 
Cash and cash equivalents at end of period
  $ 2,526,326     $ 2,557,996  
                 
SUPPLEMENTAL INFORMATION
               
   Cash paid for interest during the period
  $ 74,693     $ 51,798  
   Cash paid for income taxes during the period
  $ 53,000     $ -  
                 
NON-CASH TRANSACTIONS
               
   Conversion of Series A Preferred Stock into common shares
  $ 95     $ 27  
 
   Conversion of Series B Preferred Stock into common shares
  $ 600,000     $ -  
 
See accompanying notes to the consolidated financial statements
 
F-3

 
VERTEX ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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 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-owed 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 $3,750 and inventory purchases from related parties of $6,109,872 and $2,782,846 for the six months ended June 30, 2011 and 2010, respectively.  As of June 30, 2011, the Company owes $968,276 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 $3,293,572 and $3,402,440 for the six months ended June 30, 2011 and 2010, respectively.  The costs arise from the 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 $6,629 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 will expire in June 2012.

The Company leases approximately 45,000 barrels in storage capacity for its TCEP division at Cedar Marine Terminal, located in Baytown, Texas.  The monthly lease expense is $45,000. The Company is also leasing approximately 3,000 barrels in additional storage capacity for $4,500 per month. This lease will expire in June 2012.

 
F-4

 
VERTEX ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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 six months ended June 30, 2011, the Company’s cash balances exceeded the federally insured limits. No losses have been incurred relating to this concentration.
 
At June 30, 2011 and 2010, 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
    46 %     0 %     26 %     24 %
Customer 2
    12 %     0 %     22 %     43 %
Customer 3
    11 %     34 %     17 %     0 %
Customer 4
    11 %     27 %     8 %     32 %
Customer 5
    0 %     0 %     10 %     0 %

The Company purchases goods and services from one company that represented 27% of total purchases for the six months ended June 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 $15,325,701 through December 31, 2011 based on forward contract pricing as of July 27, 2011.             .

The Company has one debt facility available for use, of which there were no amounts outstanding as of June 30, 2011 and December 31, 2010, respectively. See note 4 for further details.

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.

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 $2.6 million for the six months ended June 30, 2011.

 
F-5

 
VERTEX ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
(UNAUDITED)
 

NOTE 4. NOTES PAYABLE

In September 2010, the Company entered into a loan agreement with Bank of America Merrill Lynch. The balance on the line of credit was $0 and $2,950,000 was available at June 30, 2011. The loan agreement is guaranteed by Cedar Marine Terminal, 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 June 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 expires on October 14, 2011.

NOTE 5. STOCK BASED COMPENSATION

The stock based compensation cost that has been charged against income by the Company was $61,680 and $101,163 for the six months ended June 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 will remain 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 day 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, 6,250shares 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 is $11,201.

Stock option activity for the six months ended June 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
    -       -       -       -  
Options exercised
    -       -       -       -  
Options cancelled/forfeited/expired
    (15,000 )     (.62 )     -       (6,622 )
Outstanding at June 30, 2011
    2,688,334     $ 5.84       7.10     $ 709,204  
                                 
Vested at June 30, 2011
    1,826,026     $ 8.29       6.68     $ 360,175  
                                 
Exercisable at June 30, 2011
    1,826,026     $ 8.29       6.68     $ 360,175  
                                 

 
F-6

 
VERTEX ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
(UNAUDITED)
 
A summary of the Company’s stock warrant activity and related information for the six months ended June 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
    (336,281 )     (26.91 )     -       (20,177 )
Warrants at June 30, 2011
    1,422,176     $ 11.42       1.87     $ 161,655  
                                 
Vested at June 30, 2011
    1,314,889     $ 12.28       1.78     $ 132,334  
                                 
Exercisable at June 30, 2011
    1,314,889     $ 12.28       1.78     $ 132,334  
                                 

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 six months ended June 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 six months ended June 30, 2011 does not include options to purchase 1,980,184 shares and warrants to purchase 1,307,980 shares due to their anti-dilutive effect, since the instruments were out of the money.
 
The following is a reconciliation of the numerator and denominator for basic and diluted earnings per share for the six months ended June 30, 2011 and 2010:
 
   
2011
   
2010
 
             
Basic Earnings per Share
           
Numerator:
           
     Income  available to common shareholders
  $ 2,606,836     $ 552,567  
Denominator:
               
    Weighted-average shares outstanding
    8,487,392       8,256,375  
                 
Basic earnings per share
  $ 0.31     $ 0.07  
 
 
F-7

 
VERTEX ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
(UNAUDITED)
 
             
             
Diluted Earnings per Share
           
Numerator:
           
     Income
  $ 2,606,836     $ 552,567  
Denominator:
               
     Weighted-average shares outstanding
    8,487,392       8,256,375  
     Effect of dilutive securities
               
          Stock options and warrants
    822,346       641,939  
          Preferred stock
    4,580,161       4,728,616  
                 
     Diluted weighted-average shares outstanding
    13,889,899       13,626,930  
                 
Diluted earnings per share
  $ 0.19     $ 0.04  

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 June 30, 2011 there were 9,106,404 common shares issued and outstanding.

During the six months ending June 30, 2011 there were 95,555 shares of the Company's Series A Preferred Stock converted into the Company's common stock and warrants and options to purchase 40,000 shares of the Company's common stock were exercised for cash proceeds of $4,000.  In addition, 600,000 shares of the Series B Preferred Stock were converted into the Company's common stock as discussed in note 8.

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 June 30, 2011 there were 4,580,161 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 outstanding shares of Series B Preferred Stock automatically converted, without any required action by the 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 six months ending June 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 a certain thermal/chemical extraction technology (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.

 
F-8

 
VERTEX ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
(UNAUDITED)
 
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 six months ended June 30, 2011 and 2010 were $194,726 and $260,401 respectively. The Company is amortizing the value of the license agreement over a fifteen year period.  Amortization expense was $70,866 and $62,376 for the six months ending June 30, 2011 and 2010, respectively.  No indications of impairment of the license existed as of June 30, 2011.

NOTE 10.  SEGMENT REPORTING

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

SIX MONTHS ENDED JUNE 30, 2011
 
   
         
Refining &
       
   
Black Oil
   
Marketing
   
Total
 
Revenues
  $ 8,848,149     $ 39,251,614     $ 48,099,763  
                         
Net income (loss) from operations
  $ 39,632     $ 2,664,111     $ 2,703,743  
                         
Total Assets
  $ 7,875,050     $ 6,161,647     $ 14,036,697  
                         
   
SIX MONTHS ENDED JUNE 30, 2010
 
   
           
Refining &
         
   
Black Oil
   
Marketing
   
Total
 
Revenues
  $ 8,052,942     $ 21,090,949     $ 29,143,891  
                         
Net income (loss) from operations
  $ 249,188     $ 235,977     $ 485,165  
                         
                         
THREE MONTHS ENDED JUNE 30, 2011
 
   
           
Refining &
         
   
Black Oil
   
Marketing
   
Total
 
Revenues
  $ 4,446,043     $ 23,344,817     $ 27,790,860  
                         
Net income (loss) from operations
  $ 37,630     $ 1,421,272     $ 1,458,902  
                         
 
 
F-9

 
VERTEX ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
(UNAUDITED)
 
THREE MONTHS ENDED JUNE 30, 2010
 
   
           
Refining &
         
   
Black Oil
   
Marketing
   
Total
 
Revenues
  $ 4,892,328     $ 10,978,483     $ 15,870,811  
                         
Net income (loss) from operations
  $ 279,912     $ (71,403 )   $ 208,509  
                         
                         

NOTE 11. SUBSEQUENT EVENTS

Subsequent to June 30, 2011, the available credit on the Line of Credit is $3,500,000 of which $550,000 has been allocated to the outstanding letter of credit.  As of August 5, 2011 the outstanding balance drawn on the line of credit is $0 leaving an available balance for draw downs of $2,950,000.

Subsequent to the six months ending June 30, 2011, a total of 12,586 shares of the Company’s Series A Preferred Stock were converted into 12,586 shares of the Company’s common stock.
 
 
 
 
 
 
 
 
 
 
 
F-10

 
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 provide a range of services designed to aggregate, process, and recycle industrial and commercial waste streams and off specification commercial chemical products. We currently provide these services in 13 states, with our primary focus in the Gulf Coast and Central Midwest Region of the United States.  Our primary focus is on the recycling of used motor oil and other distressed hydrocarbon streams. This is accomplished (1) through our Black Oil division, which aggregates used motor oil from third-party collectors and manages the delivery of this feedstock to third-party re-refining facilities, as well as fuel oil blenders, and burners of black oil, and (2) through our Refining and Marketing division, which aggregates hydrocarbon streams from collectors and generators and manages the delivery of the hydrocarbon products to a third-party facility for further processing, and then manages the sale of the end products. In addition, we have implemented a proprietary licensed thermal chemical extraction process that, through an operating and license agreement with a related party, will process used motor oil and convert it to higher value products such as fuel oil cutter and a feedstock component for major refineries.

 
-3-

 
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. Our management has chosen to contract for the use of assets rather than purchase or build and own them in order to provide flexibility in the Company’s capital equipment requirements in the event there is a need for more or less capacity due to rapid growth or contraction in the future. We expect to continue to rely on contracts for access to assets moving forward, to avoid the initial capital expenditures that would be required to build our own facilities.

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. We are currently operating under the terms of the expired agreement and 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.  These related party transactions are discussed in detail in the Form 8-K/A filed on June 26, 2009 and our Report on Form 10-K, filed with the Commission on March 31, 2011. 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 certain proprietary technology relating to the re-refining of certain oil feedstock referred to as our “thermal chemical extraction process” (“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 thermal chemical extraction process 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.

 
-4-

 
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 $2,214,630 (the “R&D Costs”), in any market in the world (except at CMT’s Baytown facility where it is non-exclusive).

Strategy and Plan of Operations

Our goal is to continue to grow our business of recycling used motor oil and other distressed hydrocarbon streams. Strategies to achieve this goal include (1) working to grow revenues in core businesses, (2) seeking to increase margins through developing additional processing capabilities, including but not limited to the thermal chemical extraction process at additional locations other than Baytown, Texas, (3) increasing market share through greenfield development or through acquisitions, and (4) continued pursuit of alternative energy project development opportunities, some of which were originally sourced by World Waste.

·  
Our primary focus is to continue to supply used motor oil and other hydrocarbons 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 plan to seek to develop relationships with several other re-refining facilities to serve as such facilities’ primary and exclusive feedstock provider.

·  
We intend to work to improve margins by applying new technologies, including but not limited to the re-refining of certain oil feedstock through the “thermal chemical extraction process” to existing and new feedstock streams. The first application of this technology at CMT’s Baytown, Texas facility came on-line during the third quarter of 2009 and we have continued to enhance the facility and process since that time.  We also plan to build additional facilities for various processes to implement proprietary company-owned, leased, or potentially acquired technologies to upgrade feedstock materials to create fuel oil cutter, vacuum gas oil and other value-added energy products.  By moving from our historical role as a value-added logistics provider, to operating as an actual re-refiner ourselves, we plan to improve margins through the upgrading of used motor oil and transmix inventories into higher value end products, funding permitting, of which there can be no assurance.

·  
We plan to seek to grow our market share by consolidating feedstock supply through partnering with or acquiring collection and aggregation assets, funding permitting. For example, we may seek to use a combination of stock and cash to acquire or enter into joint ventures with various local used motor oil collectors and aggregators, technology providers, real estate partners and others. Such acquisitions and/or ventures, if successful, could add to revenues 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 the contracted TCEP technology.  This may include the greenfield development of collection assets, terminals, re-refining facilities and equipment and opportunistic mergers and acquisitions.

 
-5-

 
·  
We will continue to evaluate and potentially pursue various alternative energy project development opportunities.  These opportunities may be a continuation of the projects sourced originally by World Waste and/or may include new projects initiated by us.

Recent Events

In April 2011, we entered into a marketing agreement with a strategic petroleum products trading company where we will jointly procure and market black oil feedstock and split the gross profit resulting in the sale equally. As such, the inventory related to this venture has been paid for and the cost associated has been partially reimbursed to us; however no gross profit will not be until product is sold.

From June 2nd to June 15th 2011 (ten (10) 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 600,000 outstanding shares of Series B Preferred Stock.  As a result, effective June 15, 2011, all 600,000 outstanding shares of Series B Preferred Stock automatically converted, without any required action by any holder thereof, into 600,000 shares of the Company’s common stock.

In June 2011, we extended our consulting agreement for investor relations services.  The agreement was made effective as of April 15, 2011 and will remain in effect until October 14, 2011.  We agreed to compensate the consultant with a monthly fee of $7,875 and reimburse the consultant for expenses incurred in connection with and pursuant to the agreement.  The agreement may be terminated by either party at any time upon 30 day 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, 6,250 vested immediately and the remainder vest at 33 1/3% per year over the next three years.

In May 2011, the Company entered into an agreement to purchase used oil feedstock from a third party.  The agreement provides for the Company to purchase a minimum of 400,000 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 quarterly.  The agreement continues until May 31, 2012; and month to month thereafter unless terminated by either party with 30 days prior written notice.

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 Holdings, LP, which is a related party, controlled by Benjamin P. Cowart, our largest shareholder, President and Director (“Vertex LP”).   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 (the “Right of First Refusal”).

Pursuant to the merger agreement, the Company formed a committee of its board of directors (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 Dave 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.

 
-6-

 
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, the approval of the Company’s shareholders.

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 our thermal chemical extraction process.  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.

 
-7-

 
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.
 
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2011 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2010
 
Set forth below are our results of operations for the three months ended June 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 June 30,
             
   
2011
   
2010
   
$ Change
   
% Change
 
Revenues
  $ 27,790,860     $ 15,870,811     $ 11,920,049       75 %
                                 
Cost of Revenues
    25,325,275       14,962,107       (10,363,168 )     (69 )%
                                 
Gross Profit
    2,465,585       908,704       1,556,881       171 %
                                 
Selling, general and administrative expenses
    1,006,683       700,195       (306,488 )     (44 )%
                                 
Income from operations
    1,458,902       208,509       1,250,393       600 %
                                 
Other Income
    -       100,000       (100,000 )     (100 %)
Interest Expense
    (25,177 )     (25,952 )     (775 )     3 %
Income Tax
    (22,986 )     -       (22,986 )     (100 )%
                                 
Net income
  $ 1,410,739     $ 282,557     $ 1,128,182       399 %
 
 
-8-

 
Each of our segments’ gross profit during the three months ended June 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 June 30,
             
Black Oil Segment
 
2011
   
2010
   
$ Change
   
% Change
 
Total revenue
  $ 4,446,043     $ 4,892,328     $ (446,285 )     (9 )%
Total cost of revenue
    4,028,171       4,338,091       309,920       7 %
Gross profit
  $ 417,872     $ 554,237     $ (136,365 )     (25 )%
                                 
Refining Segment
                               
Total revenue
  $ 23,344,816     $ 10,978,483     $ 12,366,333       113 %
Total cost of revenue
    21,297,103       10,624,016       (10,673,087 )     (100 )%
Gross profit
  $ 2,047,713     $ 354,467     $ 1,693,246       478 %
 
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 75% for the second quarter of 2011, compared to the same period in 2010, due to increases in volume and commodity prices during the second quarter of 2011, compared to the second quarter of 2010.  The average posting (U.S. Gulfcoast Residual Fuel No. 6 3%) for the three months ended June 30, 2011 increased $29.94 per barrel from a three month average of $68.52 per barrel during the 2010 period to $98.46 per barrel during the 2011 period.  On average, prices we received for our products increased 45% for the quarter ended June 30, 2011, compared to the prior year’s quarter, resulting in an $11.9 million increase in revenue.
 
Overall volumes increased during the three months ended June 30, 2011, compared to the prior year’s period.  This increase was a result of utilizing more Black Oil in the contracted TCEP process, as well as increased volumes in each of the products we manage.
 
Our overall volume increased 9% for the three months ended June 30, 2011, and our per barrel margin increased approximately 149% from the three months ended June 30, 2010.
 
Our Refining and Marketing division experienced an increase in production of 24% for its fuel oil cutter product for the three months ended June 30, 2011, compared to the same period in 2010, and commodity price increases of approximately 46% for the same period. The average posting (U.S. Gulfcoast No. 2 Waterborne) for the three months ended June 30, 2011 increased $40.11 per barrel from a three month average of $86.94 per barrel during the three months ended June 30, 2010 to $127.05 per barrel during the three months ended June 30, 2011.   
 
The thermal/chemical extraction technology generated revenues of $12,705,047 during the three months ended June 30, 2011, with cost of revenues of $11,928,146, producing a gross profit of $776,901.  If the Company did not have the rights to license the use of the technology, its income from operations would have been approximately $490,556 lower for the three months ended June 30, 2011. The Company’s current operations for the three months ended June 30, 2011 would have been negatively impacted if the Company were unable to use the licensing agreement.  We currently operate this technology from Vertex LP pursuant to a perpetual license as described above under “Operating and Licensing Agreement.”
 
 
-9-

 
Our Pygas production increased 96% for the three months ended June 30, 2011, compared to the same period in 2010 and commodity prices increased approximately 45% for our finished product for the three month period ended June 30, 2011, compared to the same period in 2010.
 
Our gasoline blendstock volumes increased 92% for the three months ended June 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 June 30, 2011, compared to the three months ended June 30, 2010, was due to substantial increases in volume coupled with increased market prices.  Overall volume for the Refining and Marketing division increased 37% during the three month period ended June 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 June 30 2011, compared to the three months ended June 30, 2010.
 
The following table sets forth the high and low spot prices during the first six 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)
  $ 2.29  
April 26
  $ 1.86  
February 8
U.S. Gulfcoast Residual Fuel No. 6 3% (dollars per barrel)
  $ 75.70  
January 7
  $ 60.55  
May 25
NYMEX Crude oil (dollars per barrel)
  $ 86.19  
May 3
  $ 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 six 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)
  $ 104.30  
April 29
  $ 76.70  
January 4
NYMEX Crude oil (dollars per barrel)
  $ 113.93  
April 29
  $ 84.32  
February 15
 Reported in Platt's US Marketscan (Gulf Coast)
                   
 
We have seen a consistent increase in each of the benchmark commodities we track through June 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.
 
 
-10-

 
            During the three months ended June 30, 2011, gross profit increased 171% 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 $1,006,683 for the three months ended June 30, 2011, compared to $700,195 from the prior year’s period, an increase of $306,488 or 44% from the prior period, mainly due to increased accounting, legal and payroll costs from the prior period.
 
We had net income of $1,410,739 for the three months ended June 30, 2011, compared to net income of $282,557 for the three months ended June 30, 2010, an increase in net income of $1,128,182 or 399% 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 75% increase in revenues and a 171% increase in gross profit helped to offset the additional 44% increase in selling, general and administrative expenses incurred during the period ended June 30, 2011, compared to the three months ended June 30, 2010.
 
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2011 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2010
 
Set forth below are our results of operations for the six months ended June 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.
 
   
Six Months Ended June 30,
             
   
2011
   
2010
   
$ Change
   
% Change
 
Total Revenues
  $ 48,099,763     $ 29,143,891     $ 18,955,872       65 %
                                 
Cost of Revenues
    43,363,282       27,207,357       (16,155,925 )     (59 )%
                                 
Gross Profit
    4,736,481       1,936,534       2,799,947       145 %
                                 
Selling, general and administrative expenses
    2,032,738       1,451,369       (581,369 )     (40 )%
                                 
Income from operations
    2,703,743       485,165       2,218,578       457 %
                                 
Other Income
    -       130,000       (130,000 )     (100 )%
Interest Expense
    (54,218 )     (62,598 )     8,380       13 %
Income Tax
    (42,689 )     -       (42,689 )     (100 )%
                                 
Net income
  $ 2,606,836     $ 552,567     $ 2,054,269       372 %

 
-11-

 
Each of our segments’ gross profit during the six months ended June 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):
 
   
Six Months Ended June 30,
             
Black Oil Segment
 
2011
   
2010
   
$ Change
   
% Change
 
Total revenue
  $ 8,848,149     $ 8,052,942     $ 795,207       10 %
Total cost of revenue
    8,022,741       7,228,168       (794,573 )     (11 )%
Gross profit
  $ 825,408     $ 824,774     $ 634       0 %
                                 
Refining Segment
                               
Total revenue
  $ 39,251,614     $ 21,090,949     $ 18,160,665       86 %
Total cost of revenue
    35,340,541       19,979,189       (15,361,352 )     (77 )%
Gross profit
  $ 3,911,073     $ 1,111,760     $ 2,799,313       252 %

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 65% during the six month period ended June 30, 2011, compared to the same period in 2010, largely due to increases in volume and commodity prices for the six months ended June 30, 2011, compared to the six months ended June 30, 2010.  The average posting (U.S. Gulfcoast Residual Fuel No. 6 3%) for the six months ended June 30, 2011 increased $23.35 per barrel from a six month average of $69.60 per barrel during the 2010 period to $92.95 per barrel during the 2011 period.  On average, prices we received for our products increased 34% for the six month period ended June 30, 2011, compared to the same period during 2010 which resulted in an $18.9 million increase in revenue.
 
Overall volumes increased 14% during the six month period ended June 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 20% for the six months ended June 30, 2011, compared to the same period in 2010, largely due to the increased volume of black oil processed through our TCEP technology.
 
Our overall volume increased 14% for the six month period ended June 30, 2011, and our per barrel margin increased approximately 115% from the six months ended June 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 34% for its fuel oil cutter product for the six months ended June 30, 2011, compared to the same period in 2010, and commodity price increases of approximately 42% for the same period. The average posting (U.S. Gulfcoast No. 2 Waterborne) for the six months ended June 30, 2011 increased $35.99 per barrel from a six month average of $85.68 per barrel during the six months ended June 30, 2010 to $121.67 per barrel during the six months ended June 30, 2011.   
 
The thermal/chemical extraction technology generated revenues of $21,208,948 during the six months ended June 30, 2011, with cost of revenues of $19,946,033, producing a gross profit of $1,262,915.  If the Company did not have the rights to license the use of the technology, its income from operations would have been approximately $688,065 lower for the six months ended June 30, 2011. The Company’s current operations for the period ended June 30, 2011 would have been negatively impacted if the Company were unable to use the licensing agreement.
 
 
-12-

 
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.

Provided the Company’s expenses do not increase, the Company is able to meet its objectives and reduce its operating costs associated with the TCEP technology, as well as increase volumes of Black Oil feedstock being purchased, and none of our competitors bring similar technology to market as our TCEP technology, we anticipate our revenues increasing moving forward.  In addition, if we are able to accomplish our goals, as described above, we believe our cash flow will improve substantially which will further the Company’s ability to expand its contracted TCEP operations as well as reduce its reliance on its Line of Credit with Bank of America. This will further increase available cash for future research and development and potentially the creation of additional facilities using its license.

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 18% for the six months ended June 30, 2011, compared to the same period in 2010 and commodity prices increased approximately 36% for our finished product for the six month period ended June 30, 2011, compared to the same period in 2010.
 
Our gasoline blendstock volumes increased 101% for the six months ended June 30, 2011 as compared to the same period in 2010.  The overall increase in revenues associated with our Refining and Marketing division for the six months ended June 30, 2011, compared to the six month period ended June 30, 2010, was due to small increases in volume coupled with increased market prices.  Overall volume for the Refining and Marketing division increased 31% during the six month period ended June 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 six months ended June 30, 2011, compared to the six months ended June 30, 2010.
 
During the six months ended June 30, 2011, gross profit increased 145% 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 six month period ended June 30, 2011 as compared to June 30, 2010.
 
We had selling, general and administrative expenses of $2,032,738 for the six months ended June 30, 2011, compared to $1,451,369 from the prior year’s period, an increase of $581,369 or 40% from the prior period. This increase is primarily due to increased accounting, legal, and payroll costs associated with being a public company.
 
We had net income of $2,606,836 for the six months ended June 30, 2011, compared to net income of $552,567 for the six months ended June 30, 2010, an increase in net income of $2,054,269 or 372% from the prior year’s period.  The increase in net income was mainly due to a 65% increase in revenue, which was offset by a 59% 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 145% increase in gross profit.
 
 
-13-

 
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.   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 $12,863,217 as of June 30, 2011 compared to $8,139,345 at December 31, 2010.  This increase was partially due to $2,606,836 of net income which was generated during the six months ended June 30, 2011 as well as the $2,145,868 increase in inventory as of June 30, 2011, compared to December 30, 2010, along with the increase in our accounts receivable of $631,157 between June 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 $123,860 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 June 30, 2011, compared to December 31, 2010.
 
Total current assets as of June 30, 2011 of $10,804,262, consisted of cash and cash equivalents of $2,526,326, accounts receivable, net, of $2,113,667, accounts receivable-related party of $3,900 (representing funds due to 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 $6,047,649, and prepaid expenses of $112,720.  Long term assets consisted of fixed assets, net, of $101,129, and a licensing agreement in the net amount of $1,957,826, which represents the value of the Company’s licensing agreement for the use of the thermal chemical extraction technology, net of amortization.  As of June 30, 2011, an additional $814,630 of development investments have been made to the thermal/chemical process technology and added to the original $1.4 million license value. The Company has fully paid Cedar Marine Terminals (“CMT”) for the license for the thermal/chemical process 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 $7,051,828 as of June 30, 2011, compared to $5,600,472 at December 31, 2010.  This increase was largely due to the increase in commodity prices during the period ended June 30, 2011, which in turn increased the cost of the products we purchase and attributed to the increase in accounts payable.  At June 30, 2011, current liabilities consisted of accounts payable of $6,083,552, accounts payable – related parties of $968,276.  Accounts payable – related parties included amounts payable to Cedar Marine Terminal (“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 $3,752,434 as of June 30, 2011.  Excluding current liabilities to and current assets relating to related parties our working capital was $4,716,810 as of June 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 $2,523,817 improvement in working capital from December 31, 2010 to June 30, 2011 is due to the net income of $2,606,836 which we generated for the six months ended June 30, 2011, the increased inventory of $2,145,868 (which increased total current assets), as well as the increase in our accounts receivable of $631,157 as of June 30, 2011, compared to December 31, 2010.
 
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.
 
 
-14-

 
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. As of June 30, 2011, there was no balance due on the Line of Credit, of which there was $2,950,000 available (based on the criteria set forth in the line of credit).

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 expires on October 14, 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 six months ended June 30, 2011, the required amount of the standby letter of credit was reduced to $550,000.
 
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.
 
 
-15-

 
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 9,118,990 shares, and approximately 6,600,000 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.

Additionally, the Company has approximately 4.6 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, we expect that our common stock will continue to be eligible to trade on the OTCQB or OTCBB (assuming we take steps to re-quote our common stock on the OTCBB in the future), another over-the-counter quotation system, 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.

 
-16-

 
 
Cash flows for the six months ended June 30, 2011 compared to the six months ended June 30, 2010
 
   
Six Months Ended June
 
   
2011
   
2010
 
             
Beginning cash and cash equivalents
  $ 744,313     $ 514,136  
                 
Net cash provided by (used in):
               
Operating activities
    2,005,013       1,253,237  
Investing activities
    (227,000 )     (267,555 )
Financing activities
    4,000       1,058,178  
                 
Net increase in cash and cash equivalents
    1,782,013       2,043,860  
                 
Ending cash and cash equivalents
  $ 2,526,326     $ 2,557,996  
 
Operating activities provided cash of $2,005,013 for the six months ended June 30, 2011 as compared to providing $1,253,237 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 increase in cash provided by operating activities are related to $2,606,836 of net income, $1,490,353 of increase in accounts payable and $561,003 of increase in accounts payable-related parties, for the six months ended June 30, 2011, offset by $2,145,868 of increase in inventory, and $631,157 increase in accounts receivable. In April 2011, we entered into a marketing agreement with a strategic petroleum products trading company where we will jointly procure and market black oil feedstock and split the gross profit resulting in the sale equally. As such, the inventory related to this venture has been paid for and the cost associated has been partially reimbursed to us; however no gross profit has been recognized and will not be until product is sold.  Additionally, non-cash expense related to stock compensation expense (associated with the vesting of previously granted options to management) provided $61,680 of liquidity for the six months ended June 30, 2011 and depreciation and amortization contributed $78,301 of net cash.
 
Investing activities used cash of $227,000 for the six months ended June 30, 2011 as compared to having used $267,555 of cash during the corresponding period in 2010.  Investing activities for the six months ended June 30, 2011 are comprised of $194,726 in cash payments related to the license of the thermal chemical extraction process and $32,274 of purchase of fixed assets.
 
Financing activities provided $4,000 during the six months ended June 30, 2011 resulting from proceeds from the exercise of common stock warrants.
 
In January 2010, the Company began a private placement offering to accredited investors only of up to 2,000,000 units (the “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”).  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 Offering. 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.

 
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During 2010, the Company sold 600,000 Units and raised $600,000 in connection with the 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 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 $1,439,866 of these NOLs leaving approximately $39.8 million of potential NOLs of which we expect to utilize approximately $2.6 million for the six months ended June 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.

 
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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.
 
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

In June 2009, the FASB issued ASC Topic 810-10-15, “Consolidation-Variable Interest Entities,” or Topic 810-10-15.  Topic 810-10-15 improves financial reporting by enterprises involved with variable interest entities and provides more relevant and reliable information to users of financial statements.  Topic 810-10-15 is effective as of the beginning of the first annual reporting period that begins after November 15, 2009 and for interim periods within that first annual reporting period.  We adopted Topic 810-10-15 on January 1, 2010, but it did not have a material impact on our consolidated financial statements.

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 proposed thermal chemical extraction process.

 
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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.
 
 
 
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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. We are not currently involved in legal proceedings that could reasonably be expected to have a material adverse effect on our business, prospects, financial condition or results of operations. 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 as set forth in our Form 10-K, prior to making an investment in the Company.

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

During the three months ended June 30, 2011 a total of 54,235 shares of the Company's Series A Preferred Stock were converted into 54,235 shares of our common stock on a one for one basis.

Effective June 15, 2011, all 600,000 outstanding shares of Series B Preferred Stock automatically converted, without any required action by any holder thereof, into 600,000 shares of the Company’s common stock as a result of the triggering of the automatic conversion feature of such shares, due to the fact that the Company’s common stock traded at or above $2.00 per share from June 2nd to June 15th 2011 (ten (10) consecutive trading days).

Subsequent to the three months ended June 30, 2011, a total of 12,586 shares of the Company's Series A Preferred Stock were converted into 12,586 shares of our common stock on a one for one basis.

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.

In June 2011, we extended our consulting agreement for investor relations services.  The agreement was made effective as of April 15, 2011 and will remain in effect until October 14, 2011.  We agreed to compensate the consultant with a monthly fee of $7,875 and reimburse the consultant for 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, 6,250 vested immediately and the remainder vest at 33 1/3% per year over the next three years.

We claim an exemption from registration afforded by Section 4(2) of the Securities Act of 1933, as amended, for the above issuance, since the issuance did not involve a public offering, the recipient took the securities for investment and not resale and we took appropriate measures to restrict transfer.

Item 3.     Defaults Upon Senior Securities

None.

Item 4.     (Removed and Reserved)

 
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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
   
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
 
 
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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
   
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.
 
 
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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.

(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.
 
 
-24-

 
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: August 8, 2011
By: /s/ Benjamin P. Cowart
 
Benjamin P. Cowart
 
Chief Executive Officer
 
(Principal Executive Officer)
   
   
Date: August 8, 2011
By: /s/ Chris Carlson
 
Chris Carlson
 
Chief Financial Officer
 
(Principal Financial Officer)
   



 

 
 
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