Attached files

file filename
EX-31.2 - EXHIBIT 31.2 - Vertex Energy Inc.a6302015-ex312.htm
EX-31.1 - EXHIBIT 31.1 - Vertex Energy Inc.a6302015-ex311.htm
EX-10.74 - EXHIBIT 10.74 - Vertex Energy Inc.a6302015-ex1074.htm
EX-10.73 - EXHIBIT 10.73 - Vertex Energy Inc.a6302015-ex1073.htm
EX-32.2 - EXHIBIT 32.2 - Vertex Energy Inc.a6302015-ex322.htm
EX-32.1 - EXHIBIT 32.1 - Vertex Energy Inc.a6302015-ex321.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal quarter ended June 30, 2015
  
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE TRANSITION PERIOD FROM _____________ TO _____________
 
Commission File Number 001-11476
 
———————
VERTEX ENERGY, INC.
(Exact name of registrant as specified in its charter)
———————
NEVADA
94-3439569
(State or other jurisdiction of
(I.R.S. Employer Identification No.)
incorporation or organization)
 
 
 
1331 GEMINI STREET, SUITE 250
HOUSTON, TEXAS
77058
(Address of principal executive offices)
(Zip Code)
 
Registrant's telephone number, including area code: 866-660-8156

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

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

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

State the number of shares of the issuer’s common stock outstanding, as of the latest practicable date: 28,181,761 shares of common stock issued and outstanding as of August 7, 2015.



TABLE OF CONTENTS

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




PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
VERTEX ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
 
June 30,
2015
 
December 31,
2014
ASSETS
 
 
 
 
Current assets
 
 
 
 
Cash and cash equivalents
 
$
5,717,543

 
$
6,017,076

Accounts receivable, net
 
13,033,513

 
9,936,948

Current portion of notes receivable
 
1,000,000

 
3,150,000

Inventory
 
9,088,290

 
12,620,616

Prepaid expenses
 
2,803,310

 
1,245,307

Costs in excess of billings
 

 
779,285

Total current assets
 
31,642,656

 
33,749,232

 
 
 
 
 
Noncurrent assets
 
 

 
 

 
 
 
 
 
Fixed assets, at cost
 
61,032,202

 
59,919,721

    Less accumulated depreciation
 
(5,739,802
)
 
(3,758,373
)
    Net fixed assets
 
55,292,400

 
56,161,348

Notes receivable
 
8,308,000

 
8,308,000

Intangible assets, net
 
17,640,950

 
18,512,960

Goodwill
 
4,922,353

 
4,922,353

Deferred financing cost. net
 
1,942,880

 
2,191,888

Deferred federal income tax
 

 
9,495,000

Other assets
 
481,450

 
481,450

Total noncurrent assets
 
88,588,033

 
100,072,999

TOTAL ASSETS
 
$
120,230,689

 
$
133,822,231

 
 
 
 
 
LIABILITIES AND EQUITY
 
 

 
 

Current liabilities
 
 

 
 

Accounts payable and accrued expenses
 
$
21,143,784

 
$
21,984,136

Capital leases
 
408,145

 
492,755

Current portion of long-term debt
 
4,387,831

 
40,136,584

Revolving note
 
1,815,795

 

Deferred revenue
 
524,923

 
463,210

        Total current liabilities
 
28,280,478

 
63,076,685

Long-term liabilities
 
 

 
 

Long-term debt
 
22,555,893

 
1,867,574

Derivative liability
 
5,211,085

 

Contingent consideration
 
6,069,000

 
6,069,000

Deferred federal income tax
 

 
4,189,000

Total liabilities
 
62,116,456

 
75,202,259

 
 


 


COMMITMENTS AND CONTINGENCIES
 
 
 
 
Series B Preferred shares, $.001 par value per share:
 
 
 
 
10,000,000 shares authorized, 8,064,534 and 0 shares issued and outstanding
 
 
 
 
at June 30, 2015 and December 31, 2014, respectively with liquidation preference
 
10,791,675

 

of $25,025,000 at June 30, 2015
 
 
 
 
 
 
 
 
 
EQUITY
 
 

 
 

Preferred stock, $0.001 par value per share:
 
 

 
 

50,000,000 shares authorized
 
 

 
 

Series A Convertible Preferred stock, $0.001 par value,
 
 
 
 
5,000,000 authorized and 612,943 and 630,419 issued
 
 
 
 
and outstanding at June 30, 2015 and December 31,
 
 
 
 

F-1



2014, respectively
 
613

 
630

Common stock, $0.001 par value per share;
 
 

 
 

750,000,000 shares authorized; 28,181,761 and 28,108,105
 
 
 
 
issued and outstanding at June 30, 2015 and
 
 
 
 
December 31, 2014, respectively
 
28,182

 
28,109

Additional paid-in capital
 
52,709,652

 
46,595,472

Retained earnings (accumulated deficit)
 
(5,415,889
)
 
11,995,761

Total Equity
 
$
47,322,558

 
$
58,619,972

TOTAL LIABILITIES, CONVERTIBLE PREFERRED STOCK, AND EQUITY
 
$
120,230,689

 
$
133,822,231

See accompanying notes to the consolidated financial statements

F-2



VERTEX ENERGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 2015 AND 2014
(UNAUDITED)
 
 
Three Months Ended 
 June 30,
Six Months Ended June 30,
 
 
2015
 
2014
2015
 
2014
Revenues
 
$
49,119,711

 
$
72,079,622

$
86,804,050

 
$
119,429,280

Cost of revenues
 
43,635,177

 
63,844,569

81,643,633

 
106,188,202

Gross profit
 
5,484,534

 
8,235,053

5,160,417

 
13,241,078

 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Selling, general and administrative expenses
  (exclusive of acquisition related expenses)
 
5,641,250

 
4,363,617

11,011,278

 
7,079,966

  Depreciation and amortization expense
 
1,561,314

 
1,068,273

3,118,296

 
1,800,950

  Acquisition related expenses
 

 
1,959,418

157,678

 
2,559,830

Total operating expenses
 
7,202,564

 
7,391,308

14,287,252

 
11,440,746

 
 
 
 
 
 
 
 
Income (loss) from operations
 
(1,718,030
)
 
843,745

(9,126,835
)
 
1,800,332

 
 
 
 
 
 
 
 
Other income (expense):
 
 

 
 

 
 
 
Provision for doubtful accounts
 

 

(2,650,000
)
 

Other income
 
10

 
7

18

 
377

Gain on bargain purchase
 

 
6,481,051


 
6,481,051

Other income (expense)
 
12,818

 
(10,866
)
(57,660
)
 
(10,866
)
Gain on change in value of derivative liability
 
1,816,982

 

1,816,982

 

Interest expense
 
(556,975
)
 
(657,235
)
(2,088,155
)
 
(733,046
)
Total other income (expense)
 
1,272,835

 
5,812,957

(2,978,815
)
 
5,737,516

 
 
 
 
 
 
 
 
Income (loss) before income tax
 
(445,195
)
 
6,656,702

(12,105,650
)
 
7,537,848

 
 
 
 
 
 
 
 
Income tax benefit (expense)
 

 

(5,306,000
)
 

 
 
 
 
 
 
 
 
Net income (loss)
 
$
(445,195
)
 
$
6,656,702

$
(17,411,650
)
 
$
7,537,848

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

 
$
344,380

$

 
$
325,399

 
 
 
 
 
 
 
 
Net income (loss) attributable to Vertex Energy, Inc.
 
$
(445,195
)
 
$
7,001,082

$
(17,411,650
)
 
$
7,863,247

 
 
 
 
 
 
 
 
Earnings (loss) per common share
 
 

 
 

 
 
 
Basic
 
$
(0.02
)
 
$
0.31

$
(0.62
)
 
$
0.36

Diluted
 
$
(0.02
)
 
$
0.28

$
(0.62
)
 
$
0.33

 
 
 
 
 
 
 
 
Shares used in computing earnings per share
 
 

 
 

 
 
 
Basic
 
28,130,575

 
22,826,102

28,124,492

 
22,025,316

Diluted
 
28,130,575

 
24,847,456

28,124,492

 
23,879,500


See accompanying notes to the consolidated financial statements

F-3



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

 
$
28,109

 
630,419

 
$
630

 
46,595,472

 
$
11,995,761

 
$
58,619,972

Share based compensation expense, total
 

 

 

 

 
176,426

 

 
176,426

Issuance of restricted common stock
 
56,180

 
56

 

 

 
199,944

 

 
200,000

Conversion of preferred A stock to common
 
17,476

 
17

 
(17,476
)
 
(17
)
 

 

 

Beneficial conversion feature on Preferred stock (APIC)
 

 

 

 

 
5,737,810

 

 
5,737,810

Net income (loss)
 

 

 

 

 

 
(17,411,650
)
 
(17,411,650
)
Balance on June 30, 2015
 
28,181,761

 
$
28,182

 
612,943

 
$
613

 
$
52,709,652

 
$
(5,415,889
)
 
$
47,322,558



F-4



VERTEX ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2015 AND 2014
(UNAUDITED)
 
 
Six Months Ended
 
 
June 30,
2015
 
June 30,
2014
Cash flows from operating activities
 
 
 
 
Net income (loss)
 
$
(17,411,650
)
 
$
7,537,848

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

 
 

Stock based compensation expense
 
176,426

 
101,378

Depreciation and amortization
 
3,118,296

 
1,800,950

Gain on acquisition
 

 
(6,481,051
)
Loss on asset sale
 
63,410

 

Gain on change in fair value of derivative liability
 
(1,816,982
)
 

Deferred federal income tax
 
5,306,000

 

Changes in operating assets and liabilities
 
 
 
 
Accounts receivable
 
(3,096,566
)
 
(2,237,992
)
Accounts receivable - other
 

 
950,000

Allowance for doubtful accounts
 
2,650,000

 

Notes receivable-related party
 

 
(1,027,321
)
Inventory
 
3,532,326

 
(3,679,989
)
Prepaid expenses
 
(327,343
)
 
(2,717,571
)
Costs in excess of billings
 
779,285

 

Accounts payable
 
(640,352
)
 
9,464,956

Deferred revenue
 
61,713

 

     Other assets
 

 
(79,806
)
Net cash provided by (used in) operating activities
 
(7,605,437
)
 
3,631,402

 
 
 

 
 

Cash flows from investing activities
 
 

 
 

Acquisition of Omega
 

 
(28,764,099
)
Purchase of fixed assets
 
(1,196,240
)
 
(2,635,882
)
Proceeds from asset sales
 
4,500

 

Notes receivable
 
(500,000
)
 

Net cash used in investing activities
 
(1,691,740
)
 
(31,399,981
)
 
 
 

 
 

Cash flows from financing activities
 
 

 
 

Line of credit payments, net
 

 
304,000

Proceeds from sale of stock
 
23,557,552

 
15,803,000

Payments on notes payable
 
(16,375,703
)
 
(9,634,029
)
Proceeds from note payable
 

 
40,509,906

Proceeds from revolving note
 
1,815,795

 

Debt issue cost
 

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

 
211,062

Net cash provided by (used in) financing activities
 
8,997,644

 
44,741,782

 
 
 

 
 

Net change in cash and cash equivalents
 
(299,533
)
 
16,973,203

 
 
 

 
 

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

 
2,678,628

 
 
 

 
 

Cash and cash equivalents at end of period
 
$
5,717,543

 
$
19,651,831

 
 
 

 
 


F-5



SUPPLEMENTAL INFORMATION
 
 

 
 

Cash paid for interest
 
$
2,071,299

 
$
733,046

Cash paid for income taxes
 
$

 
$

 
 
 

 
 

NON-CASH INVESTING AND FINANCING TRANSACTIONS
 
 

 
 

Conversion of Series A Preferred Stock into common stock
 
$
17

 
$
644

   Note payable for acquisition of E-Source interest
 
$

 
$
854,050

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

 
$
231,260

   Shares issued as payment
 
$
200,000

 
$

   Beneficial conversion feature for Series B Preferred stock
 
$
5,725,819

 
$

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

 
$


 See accompanying notes to the consolidated financial statements

F-6



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

NOTE 1.  BASIS OF PRESENTATION AND NATURE OF OPERATIONS

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

NOTE 2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

New Accounting Pronouncements

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

Principles of consolidation

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

Cedar Marine Terminals, L.P. (“CMT”) operates a 19-acre bulk liquid storage facility on the Houston Ship Channel.  The terminal serves as a truck-in, barge-out facility and provides throughput terminal operations. CMT is also the site of the Thermal Chemical Extraction Process ("TCEP").
Crossroad Carriers, L.P. (“Crossroad”) is a third-party common carrier that provides transportation and logistical services for liquid petroleum products, as well as other hazardous materials and product streams.
Vertex Recovery, L.P. (“Vertex Recovery”) is a generator solutions company for the recycling and collection of used oil and oil-related residual materials from large regional and national customers throughout the U.S.  It facilitates its services through a network of independent recyclers and franchise collectors.
H&H Oil, L.P. (“H&H Oil”) collects and recycles used oil and residual materials from customers based in Austin, Baytown, San Antonio and Corpus Christi, Texas.
E-Source Holdings, LLC (“E-Source”) provides dismantling and demolition services at industrial facilities throughout the Gulf Coast.
Vertex Refining, LA, LLC is a used oil re refinery based in Marrero, Louisiana and also has assets in Belle Chasse, Louisiana.
Vertex Refining, NV, LLC ("Vertex Refining") is a base oil marketing and distribution company with customers throughout the United States.
Golden State Lubricant Works, LLC ("Golden State") operates an oil storage and blend facility based in Bakersfield, California.
Vertex Refining, OH, LLC collects and re refines used oil and residual materials from customers throughout the Midwest. Refinery operations are based in Columbus, Ohio and has collection branches located in Norwalk, Ohio Zanesville, Ohio, Ravenswood, West Virginia, and Mt. Sterling, Kentucky.
Vertex Energy Operating, LLC ("Vertex Operating"), a holding company for various of the subsidiaries described above.

Accounts receivable

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

F-7



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

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

Inventory

Inventories of products consist of feedstocks and refined petroleum products and are reported at the lower of cost or market. Cost is determined using the first-in, first-out (“FIFO”) method. The Company reviews its inventory commodities whenever events or circumstances indicate that the value may not be recoverable. The Company recognized an inventory impairment loss of $0 and $467,911 at June 30, 2015 and December 31, 2014, respectively.   

Revenue recognition

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

Income Taxes

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

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

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


F-8




Earnings per share

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

Derivative liabilities

The Company, in accordance with ASC 815-40-25 and ASC 815-10-15 Derivatives and Hedging and ASC 480-10-25 Liabilities-Distinguishing from Equity, convertible preferred shares are accounted for net, outside of shareholders' equity and warrants are accounted for as liabilities at their fair value during periods where they can be net cash settled in case of a change in control transaction.
The warrants are accounted for as a liability at their fair value at each reporting period. The value of the derivative warrant liability will be re-measured at each reporting period with changes in fair value recorded as earnings. To derive an estimate of the fair value of these warrants, a Dynamic Black Scholes model is utilized that computes the impact of a possible change in control transaction upon the exercise of the warrant shares. This process relies upon inputs such as shares outstanding, estimated stock prices, strike price and volatility assumptions to dynamically adjust the payoff of the warrants in the presence of the dilution effect.
Preferred Stock Classification

A mandatorily redeemable financial instrument shall be classified as a liability unless the redemption is required to occur only upon the liquidation or termination of the reporting entity.
A financial instrument issued in the form of shares is mandatorily redeemable if it embodies an unconditional obligation requiring the issuer to redeem the instrument by transferring its assets at a specified or determinable date (or dates) or upon an event certain to occur. A financial instrument that embodies a conditional obligation to redeem the instrument by transferring assets upon an event not certain to occur becomes mandatorily redeemable-and, therefore, becomes a liability-if that event occurs, the condition is resolved, or the event becomes certain to occur.
The Series B preferred stock requires the Company to redeem such preferred stock on the fifth anniversary of the issuance of the Series B Preferred stock if the redemption would not be subject to then existing restrictions under the Company's senior credit agreement that prohibits redemption. SEC reporting requirements provide that any possible redemption outside of the control of the Company requires the preferred stock to be classified outside of permanent equity.

NOTE 3. LIQUIDITY

During the six month period ending June 30, 2015, an event of default occurred under our financing agreements (as described in Note 8). We were able to obtain a waiver of the defaults under the credit agreements and to negotiate mutually agreed upon amendments to the credit agreements to bring the Company into compliance with such credit agreements. In June 2015, we raised an additional $25 million in cash from the issuance of Series B Preferred Stock, as further described in Note 11. We used the net proceeds to repay amounts owed under the credit agreements in the amount of $15.1 million, and plan to use the remaining proceeds for general corporate and working capital purposes. Based upon the revised terms of the credit agreements, the current net working capital, and our cash flow projections for the next twelve months, we believe that the Company will have sufficient liquidity to meet the Company's obligations for the foreseeable future.
In the event further defaults occur under the credit agreements, the lenders may exercise any and all rights and remedies available to them under their respective agreements, including demanding immediate repayment of all amounts then outstanding or initiating foreclosure or insolvency proceedings. In the event we default upon our obligations under our credit facilities, our lenders demand repayment of such obligations and we are unable to obtain alternative financing to repay or refinance such obligations, our business will be materially and adversely affected, and we may be forced to sharply curtail or cease our operations.


F-9



NOTE 4. RELATED PARTIES

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

Subsequent to June 30, 2015, the Company acquired a collection route in the state of Louisiana. The President, Chief Executive Officer and owner of which is Dan Cowart, the brother of our Chief Executive Officer and largest stockholder, Benjamin P. Cowart, as described in Note 14, Subsequent Events.

NOTE 5. CONCENTRATIONS, SIGNIFICANT CUSTOMERS, COMMITMENTS AND CONTINGENCIES
 
At June 30, 2015 and 2014 and for each of the six months then ended, the Company’s revenues and receivables were comprised of the following customer concentrations:
 
 
Six Months Ended June 30, 2015
 
Six Months Ended June 30, 2014
 
 
% of
Revenues
 
% of
Receivables
 
% of
Revenues
 
% of
Receivables
Customer 1
 
24%
 
—%
 
—%
 
—%
Customer 2
 
15%
 
17%
 
16%
 
3%
Customer 3
 
8%
 
25%
 
11%
 
9%
Customer 4
 
7%
 
18%
 
7%
 
9%
Customer 5
 
—%
 
—%
 
36%
 
19%
Customer 6
 
—%
 
—%
 
14%
 
25%
 
At June 30, 2015 and 2014 and for each of the six months then ended, the Company's segment revenues were comprised of the following customer concentrations:

 
 
% of Revenue by Segment
 
% Revenue by Segment
 
 
Six Months Ended June 30, 2015
 
Six Months Ended June 30, 2014
 
 
Black Oil
 
Refining
 
Recovery
 
Black Oil
 
Refining
 
Recovery
Customer 1
 
100%
 
—%
 
—%
 
—%
 
—%
 
—%
Customer 2
 
54%
 
46%
 
—%
 
22%
 
78%
 
—%
Customer 3
 
—%
 
100%
 
—%
 
—%
 
100%
 
—%
Customer 4
 
—%
 
100%
 
—%
 
—%
 
100%
 
—%
Customer 5
 
—%
 
—%
 
—%
 
100%
 
—%
 
—%
Customer 6
 
—%
 
—%
 
—%
 
100%
 
—%
 
—%

The Company purchases goods and services from one company that represented 18% of total purchases for the six months ended June 30, 2015 and one company that represented 10% of total purchases for the six months ended June 30, 2014

The Company has had various debt facilities available for use, of which there was $29,167,664 and $42,496,913 outstanding as of June 30, 2015 and December 31, 2014, respectively. See Note 8 for further details.


F-10



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

The Company’s revenue, profitability and future rate of growth are substantially dependent on prevailing prices for petroleum-based products. Historically, the energy markets have been very volatile, and there can be no assurance that these prices will not be subject to wide fluctuations in the future. A substantial or extended decline in such prices could have a material adverse effect on the Company’s financial position, results of operations, cash flows, and access to capital and on the quantities of petroleum-based products that the Company can economically produce.

The Company, in its normal course of business, is involved in various other claims and legal action. In the opinion of management, the outcome of these claims and actions will not have a material adverse impact upon the financial position of the Company.

For tax reporting purposes, we have NOLs of approximately $48.1 million as of June 30, 2015 that are available to reduce future taxable income. In determining the carrying value of our net deferred tax asset, the Company considered all negative and positive evidence. The Company has incurred a cumulative pre-tax loss of $14.7 million over a three year period ended June 30, 2015. As a result, we determined that a full valuation allowance for our deferred tax assets at June 30, 2015 of $5.3 million was appropriate.

NOTE 6. ACCOUNTS RECEIVABLE

Accounts receivable, net, consists of the following at:

 
 
June 30, 2015
 
December 31, 2014
Accounts receivable
 
$13,350,228
 
$10,253,663
Allowance for doubtful accounts
 
(316,715)
 
(316,715)
Accounts receivable, net
 
$13,033,513
 
$9,936,948

Accounts receivable represents amounts due from customers. Accounts receivable are recorded at invoiced amounts, net of reserves and allowances, and do not bear interest. The Company uses its best estimate to determine the required allowance for doubtful accounts based on a variety of factors, including the length of time receivables are past due, economic trends and conditions affecting its customer base, significant one-time events and historical write-off experience. Specific provisions are recorded for individual receivables when we become aware of a customer’s inability to meet its financial obligations. The Company reviews the adequacy of its reserves and allowances quarterly.

Receivable balances greater than 30 days past due are individually reviewed for collectability and if deemed uncollectible, are charged off against the allowance accounts after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any significant off balance sheet credit exposure related to its customers. 

NOTE 7. NOTES RECEIVABLE

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

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

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

As of June 30, 2015, $3,650,000 of the current notes receivable balance represents short-term loans that carry an interest rate of 9.5% per annum. No accrued interest is included in the balance. Based on management's assessment, the Company recognized an

F-11



allowance of $2,650,000 during three months ended March 31, 2015. The note is collateralized by insurance proceeds expected to be collected in 2015 and the allowance was a result of revised insurance proceed expectations.

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

NOTE 8. LINE OF CREDIT AND LONG-TERM DEBT

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

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

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

On May 2, 2014, the Company entered into a Credit and Guaranty Agreement with Goldman Sachs Bank USA. Pursuant to the agreement, Goldman Sachs Bank USA loaned the Company $40,000,000 in the form of a term loan. As set forth in the Credit Agreement, the Company has the option to select whether loans made under the Credit Agreement bear interest at (a) the greater of (i) the prime rate in effect, (ii) the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System plus ½ of 1%, (iii) the sum of (A) the Adjusted LIBOR Rate and (B) 1%, and (iv) 4.5% per annum; or (b) the greater of (i) 1.50% and (ii) the applicable ICE Benchmark Administration Limited interest rate, divided by (x) one minus, (y) the Adjusted LIBOR Rate. Interest on the Credit Agreement is payable monthly in arrears. Amortizing principal payments are due on the Credit Agreement Loan in the amount of $300,000 per fiscal quarter for June 30, 2014, September 30, 2014, December 31, 2014 and March 31, 2015, and $800,000 per fiscal quarter thereafter until maturity on May 2, 2019. The balance on the term loan was $24,000,000 at June 30, 2015.

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

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

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


F-12



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

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

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

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

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

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

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

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

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

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

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

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

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

The Lender also waived all of the prior defaults which the Lender had provided the Company notice of previously (which were all of the known defaults that existed at the time of the parties’ entry into the Second Amendment) and the Company and its subsidiaries provided a release in favor of the Lender and its representatives and assigns. We also agreed to pay the Agent a fee of $50,000 per year (including $50,000 paid upon our entry into the Second Amendment) as an administration fee; and pay the Agent certain prepayment fees in the event we prepay amounts outstanding under the Credit Agreement prior to March 26, 2018, provided no prepayment fee is due in connection with the Required Payment or certain other mandatory prepayments required under the terms of the Credit Agreement, subject to certain exceptions.

As additional consideration for the Lender agreeing to the terms of the Second Amendment, we granted Goldman, Sachs & Co., an affiliate of the Lender (such initial holder and its assigns, if any, the “Holder”) a warrant to purchase 1,766,874 shares of our common stock which was evidenced by a Common Stock Purchase Warrant (the “Lender Warrant”). The Lender Warrant was to

F-13



expire on March 26, 2022 and originally had an exercise price equal to the lower of (x) $3.39583 per share; and (y) the lowest price per share at which we issue any common stock (or sets an exercise price for the purchase of common stock) between the date of our entry into the Lender Warrant and June 30, 2015. The Lender Warrant was exercisable by the Holder at any time after September 1, 2015, including pursuant to a cashless exercise. The Lender Warrant provided that in the event that, prior to June 30, 2015, we prepaid the amount owed under the Credit Agreement in an amount greater than $9.1 million (i.e., in an amount greater than the Required Payment) then the number of shares of common stock issuable upon exercise of the Lender Warrant is reduced by the pro rata amount by which the amount prepaid exceeds $9.1 million and is less than $15.1 million, provided that if prior to June 30, 2015 we prepaid at least $6 million in addition to the Required Payment the Lender Warrant automatically terminated.

On June 18, 2015, the Company entered into the Third Amendment to Credit and Guaranty Agreement (the “Third Amendment”), which amended the Credit Agreement (defined above). The amendments to the Credit Agreement effected by the Third Amendment include, but are not limited to:

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

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

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

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

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

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

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

On May 2, 2014, in connection with the closing of the Omega Refining acquisition, the Company assumed two capital leases totaling $3,154,860. Payments of $2,703,989 were made at closing and the balance was $408,145 at June 30, 2015.

The Company financed insurance premiums through various financial institutions bearing interest rates from 4% to 4.52%. All such premium finance agreements have maturities of less than one year and have a balance of $898,224 at June 30, 2015.

Effective March 27, 2015, the Company, Vertex Operating and all of the Company’s other subsidiaries other than E-Source and Golden State, entered into a Loan and Security Agreement with MidCap Business Credit LLC (“MidCap” and the “MidCap Loan Agreement”). Pursuant to the MidCap Loan Agreement, MidCap agreed to loan us up to the lesser of (i) $7 million; and (ii) 85% of the amount of accounts receivable due to us which meet certain requirements set forth in the MidCap Loan Agreement (“Qualified Accounts”), plus the lesser of (y) $3 million and (z) 50% of the cost or market value, whichever is lower, of our raw material and

F-14



finished goods which have not yet been sold, subject to the terms and conditions of the MidCap Loan Agreement (“Eligible Inventory”), minus any amount which MidCap may require from time to time in order to over secure amounts owed to MidCap under the MidCap Loan Agreement, as long as no event of default has occurred or is continuing under the terms of the MidCap Loan Agreement. The requirement of MidCap to make loans under the MidCap Loan Agreement is subject to certain standard conditions and requirements.
The MidCap Loan Agreement contains customary representations, warranties, covenants, and events of default for facilities of similar nature and size as the MidCap Loan Agreement, and requirements for the Company to indemnify MidCap for certain losses.
We also entered into a Revolving Note (the “MidCap Note”) to evidence amounts borrowed from MidCap from time to time under the MidCap Loan Agreement. Interest on the MidCap Note accrues at a fluctuating rate equal to the aggregate of: (x) the prime rate then in effect, and (y) 1.75% per annum, or at such other rate mutually agreed on from time to time by the parties, based upon the greater of (i) any balance owing under the MidCap Note at the close of each day; or (ii) a minimum assumed average daily loan balance of $3 million. Interest is payable in arrears, on the first day of each month that amounts are outstanding under the MidCap Note. The balance on the revolving note was $1,815,795 at June 30, 2015.
On January 7, 2015, E-Source entered into a loan agreement with Texas Citizens Bank to consolidate various smaller debt obligations. The loan Agreement provides a term note in the amount of $2,201,372 that matures on January 7, 2020. Borrowings bear a fixed interest rate of 5.5% per annum and interest will be calculated from the date of each advance until repayment in full or maturity. The loan has 59 scheduled monthly payments of $45,147 which includes principal and interest. The loan is collateralized by all of the assets of E-Source. The balance on the term note was $2,045,500 at June 30, 2015.

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

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

 
$
1,815,795

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

 
24,000,000

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

 
408,145

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

 
2,045,500

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

 
898,224

 
 
 
 
 
 
 
 
$
51,511,072

 
$
29,167,664


Future contractual maturities of notes payable are summarized as follows:

Creditor
 
2015
 
2016
 
2017
 
2018
 
2019
 
Thereafter
MidCap Business Credit, LLC
 
$
1,815,795

 
$

 
$

 
$

 
$

 
$

Goldman Sachs USA
 
1,600,000

 
3,200,000

 
3,200,000

 
3,200,000

 
12,800,000

 

Pacific Western Bank
 
88,044

 
186,947

 
133,154

 

 

 

Texas Citizens Bank
 
71,394

 
442,600

 
468,225

 
495,013

 
523,333

 
44,935

Various institutions
 
898,224

 

 

 

 

 

Totals
 
$
4,473,457

 
$
3,829,547

 
$
3,801,379

 
$
3,695,013

 
$
13,323,333

 
$
44,935


NOTE 9. EARNINGS 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, 2015 includes the weighted average of common shares outstanding. Diluted earnings per share reflect the potential dilution of securities that could share in the earnings of an entity, such as convertible preferred stock, stock options, warrants or convertible securities. The calculation of diluted earnings per share for the six months ended June 30, 2015

F-15



does not include options to purchase 2,037,388 shares, warrants to purchase 215,201, Series B Preferred stock for 8,064,534 shares and warrants to purchase 4,032,267 shares due to their anti-dilutive effect.

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

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2015
 
2014
 
2015
 
2014
Basic Earnings per Share
 
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
 
Net income available to common shareholders
 
$
(445,195
)
 
$
7,001,082

 
$
(17,411,650
)
 
$
7,863,247

Denominator:
 
 
 
 
 
 

 
 

Weighted-average shares outstanding
 
28,130,575

 
22,826,102

 
28,124,492

 
22,025,316

Basic earnings per share
 
$
(0.02
)
 
$
0.31

 
$
(0.62
)
 
$
0.36

 
 
 
 
 
 
 
 
 
Diluted Earnings per Share
 
 
 
 
 
 

 
 

Numerator:
 
 
 
 
 
 

 
 

Net income available to common shareholders
 
$
(445,195
)
 
$
7,001,082

 
$
(17,411,650
)
 
$
7,863,247

Denominator:
 
 
 
 
 
 

 
 

Weighted-average shares outstanding
 
28,130,575

 
22,826,102

 
28,124,492

 
22,025,316

Effect of dilutive securities
 
 
 
 
 
 

 
 

Stock options and warrants
 

 
1,417,570

 

 
1,178,626

Preferred stock
 

 
603,784

 

 
675,558

Diluted weighted-average shares outstanding
 
28,130,575

 
24,847,456

 
28,124,492

 
23,879,500

Diluted earnings per share
 
$
(0.02
)
 
$
0.28

 
$
(0.62
)
 
$
0.33

NOTE 10. 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, 2015, there were 28,181,761 common shares issued and outstanding.

Each share of the Company's common stock is entitled to equal dividends and distributions per share with respect to the common stock when, as and if declared by the Company's board of directors. No holders of any shares of the Company's common stock has a preemptive right to subscribe for any of the Company's securities, nor are any shares of the Company's common stock subject to redemption or convertible into other securities. Upon liquidation, dissolution or winding-up of the Company and after payment of creditors and preferred shareholders of the Company, if any, the assets of the Company will be divided pro rata on a share-for-share basis among the holders of the Company's common stock. Each share of the Company's common stock is entitled to one vote. Shares of the Company's common stock do not possess any cumulative voting rights.

During the six months ended June 30, 2015, a total of 17,476 shares of the Company's Series A Preferred Stock were converted into 17,476 shares of our common stock on a one-for-one basis.
On April 5, 2014, the Company issued 56,180 shares of the Company's restricted common stock in connection with the inventory true up stipulated in the Heartland purchase agreement (as described in greater detail in the Quarterly Report on form 10-Q which we filed with the Securities and Exchange Commission on May 19, 2015).
During the three months ended March 31, 2015, the Company recognized contingently issuable warrants to purchase 1,766,874 shares of our common stock in connection with the amendments to the Credit Agreement with Goldman Sachs Bank USA (see Note 8). Management has determined that the warrants will more likely than not be canceled due to certain repayment provisions on or before June 30, 2015. Due to the down round feature of the warrant, the Company used the Black-Scholes model to value these warrants and have concluded that these are level 3 inputs. Management determined a discount factor on the grant date and on the balance sheet date based on available projections of cash to be used to make the mandatory repayments which resulted in a fair value derivative liability for the warrants of $577,440 at March 31, 2015. Effective June 29, 2015, we repaid $15.1 million of the amount owed to the lender and as a result, the lender warrants and rights were canceled and terminated.

F-16



Effective on June 24, 2015, the Compensation Committee of the Board of Directors (the “Committee”) granted Chris Carlson, our Chief Financial Officer, options to purchase 75,000 shares of our common stock with an exercise price of $3.15 per share, with a ten year term, vesting at the rate of 1/4th of such options per year on the first four anniversaries of the grant, under our 2013 Stock Incentive Plan. 

NOTE 11.  PREFERRED STOCK AND DETACHABLE WARRANTS

The total number of authorized shares of the Company’s preferred stock is 50,000,000 shares, $0.001 par value per share. The total number of designated shares of the Company’s Series A Convertible Preferred Stock is 5,000,000 (“Series A Preferred”). The total number of designated shares of the Company’s Series B Preferred Stock is 10,000,000. As of June 30, 2015, there were 612,943 shares of Series A Preferred Stock issued and outstanding and 8,064,534 shares of Series B Preferred Stock issued and outstanding.
Series B Preferred Stock

Dividends on our Series B Preferred Stock accrue at an annual rate of 6% of the original issue price of the preferred stock, subject to increase under certain circumstances, and are payable on a quarterly basis. The dividends may be paid in cash or in shares of registered common stock, or some combination thereof, at the Company's discretion. If paid in registered common stock, the number of shares payable will be calculated by dividing (a) the accrued dividend by (b) 90% of the arithmetic average of the volume weighted average price of the Company’s common stock for the 10 trading days immediately prior to the applicable date of determination.

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

The Series B Preferred Stock accrues a dividend, payable quarterly in arrears (based on calendar quarters), in the amount of 6% per annum of the original issuance price of the Series B Preferred Stock ($3.10 per share or $25.0 million in aggregate).

The dividend is payable by the Company, at the Company’s election, in registered common stock of the Company (if available) or cash. In the event dividends are paid in registered common stock of the Company, the number of shares payable will be calculated by dividing (a) the accrued dividend by (b) 90% of the arithmetic average of the volume weighted average price (VWAP) of the Company’s common stock for the 10 trading days immediately prior to the applicable date of determination (the “Dividend Stock Payment Price”). Notwithstanding the foregoing, in no event may the Company pay dividends in common stock unless the applicable Dividend Stock Payment Price is above $2.91. If the Company is prohibited from paying the dividend in cash (due to contractual senior credit agreements or other restrictions) or is unable to pay the dividend in registered common stock, the dividend will be paid in kind in Series B Preferred Stock shares at $3.10 per share.
 
The Series B Preferred Stock include a liquidation preference (in the amount of $3.10 per share) which is junior to the Company’s previously outstanding shares of preferred stock, senior credit facilities and other debt holders as provided in further detail in the designation of the Series B Preferred Stock (the "Designation").

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

Voting Rights

The Series B Preferred Stock votes together with the common stock on an as-converted basis, provided that each holder’s voting rights are subject to and limited by the Beneficial Ownership Limitation described below.

The Company has the option to redeem the outstanding shares of Series B Preferred Stock at $3.10 per share, plus any accrued and unpaid dividends on such Series B Preferred Stock redeemed, at any time beginning on June 24, 2017, and the Company is required to redeem the Series B Preferred Stock at $3.10 per share, plus any accrued and unpaid dividends, on June 24, 2020.

F-17



Notwithstanding either of the foregoing, the Series B Preferred Stock may not be redeemed unless and until amounts outstanding under the Company’s senior credit facility have been paid in full.

The Series B Preferred Stock contains a provision prohibiting the conversion of such Series B Preferred Stock into common stock of the Company, if upon such conversion, the holder thereof would beneficially own more than 9.999% of the Company’s then outstanding common stock (the “Beneficial Ownership Limitation”). The Beneficial Ownership Limitation does not apply to forced conversions undertaken by the Company pursuant to the terms of the Designation (summarized above). In addition to the Beneficial Ownership Limitation, certain of the Investors also entered into agreements with us to limit their ability to effect conversions of Series B Preferred Stock (and exercise of Warrants (defined below)), to prohibit them contractually from converting (or exercising) such applicable security if upon such conversion (or exercise) they would beneficially own more than 4.999% of our outstanding common stock.

Unit Offering

On June 24, 2015, we closed the transactions contemplated by the June 19, 2015 Unit Purchase Agreement (the “Purchase Agreement”) we entered into with certain institutional investors (the “Investors”), pursuant to which the Company sold the Investors an aggregate of 8,064,534 units (the “Units”), each consisting of (i) one share of Series B Preferred Stock and (ii) one warrant to purchase one-half of a share of common stock of the Company (each a “Warrant” and collectively, the “Warrants”). The Units were sold at a price of $3.10 per Unit (the “Unit Price”) (a 6.1% premium to the closing bid price of the Company’s common stock on the NASDAQ Capital Market on the date the Purchase Agreement was entered into which was $2.91 per share (the “Closing Bid Price”)). The Warrants have an exercise price of $2.92 per share ($0.01 above the Closing Bid Price). Total gross proceeds from the offering of the Units (the “Offering”) was $25.0 million.

The Placement Agent received a commission equal to 6.5% of the gross proceeds (less $4.0 million raised from certain investors in the Offering for which they will receive no fee) from the Offering, for an aggregate commission of $1.365 million which was netted against the proceeds.

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

We used the net proceeds from the Offering to repay amounts owed under the Credit Agreement in the amount of $15.1 million.
 
In addition, under the Purchase Agreement, the Company has agreed to register the shares of common stock issuable upon conversion of the Series B Preferred Stock and upon exercise of the Warrants under the Securities Act of 1933, as amended, for resale by the Investors. The Company has committed to file a registration statement on Form S-1 by the 30th day following the closing of the Offering (which filing date was met) and to cause the registration statement to become effective by the 90th day following the closing (or, in the event of a “full review” by the Securities and Exchange Commission, the 120th day following the closing), which registration statement was declared effective by the Securities and Exchange Commission on August 6, 2015. The Purchase Agreement provides for liquidated damages upon the occurrence of certain events, including, but not limited to, the failure by the Company to cause the registration statement to become effective by the deadlines set forth above. The amount of the liquidated damages is 1.0% of the aggregate subscription amount paid by an Investor for the Units affected by the event that are still held by the Investor upon the occurrence of the event, due on the date immediately following the event that caused such failure (or the 30th day following such event if the event relates to the suspension of the registration statement as described in the Purchase Agreement), and each 30 days thereafter, with such payments to be prorated on a daily basis during each 30 day period, subject to a maximum of an aggregate of 6% per annum.
 
Under the Purchase Agreement, the Company has agreed to indemnify the Investors for liabilities arising out of or relating to (i) any untrue statement of a material fact contained in the registration statement, (ii) any inaccuracy in the representations and warranties of the Company contained in the Purchase Agreement or the failure of the Company to perform its obligations under the Purchase Agreement and (iii) any failure by the Company to fulfill any undertaking included in the registration statement, subject to certain exceptions. The Investors, severally, and not jointly agreed to indemnify the Company against (i) any failure by such Investor to comply with the covenants and agreements contained in the Purchase Agreement and (ii) any untrue statement of a material fact contained in the registration statement to the extent such untrue statement was made in reliance upon and in conformity with written information furnished by or on behalf of that Investor specifically for use in preparation of the registration statement, subject to certain exceptions.

F-18




The Company agreed pursuant to the Purchase Agreement, that until 60 days following effectiveness of the registration statement filed, to register the shares of common stock underlying the Series B Preferred Stock and Warrants (the “Lock-Up Period”), to not offer or sell any common stock or securities convertible or exercisable into common stock, except pursuant to certain exceptions described in the Purchase Agreement, and each of the Company’s officers and directors agreed to not sell or offer for sale any shares of common stock until the end of the Lock-Up Period, subject to certain exceptions.

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

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

Less: warrant value
 
7,028,067

Less: beneficial conversion feature
 
5,737,810

Less: issuance costs and fees
 
1,442,448

Carrying amount at inception
 
$
10,791,675

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

Less: un-accreted discount
 
14,208,325

Carrying amount at June 30, 2015
 
$
10,791,675


In accordance with ASC 815-40-25 and ASC 815-10-15 Derivatives and Hedging and ASC 480-10-25 Liabilities-Distinguishing Liabilities from Equity as approved by shareholders, the convertible preferred shares are accounted for net outside of stockholders’ equity at $10,791,675 with the warrants accounted for as liabilities at their fair value of $5,211,085 as of June 30, 2015. The value of the derivative warrant liability will be re-measured at each reporting period with changes in fair value recorded as earnings. To derive an estimate of the fair value of these warrants, the Company utilized a dynamic Black Scholes Merton formula that computes the impact of share dilution upon the exercise of the warrant shares. This process relies upon inputs such as shares outstanding, estimated stock prices, strike price and volatility assumptions to dynamically adjust the payoff of the warrants in the presence of the dilution effect. In the event the convertible preferred shares are redeemed, any redemption price in excess of the carrying amount of the convertible preferred stock would be treated as a dividend.
The changes in liabilities measured using significant unobservable inputs for the year ended June 30, 2015 were as follows:
Level Three Roll-forward:
Level Three Roll-Forward
Item
 
Level 3
Balance at December 31, 2014
 
$

Warrants issued June 24, 2015
 
7,028,067

Change in valuation of warrants
 
(1,816,982
)
Balance at June 30, 2015
 
$
5,211,085


The warrants related to the Series B Preferred Stock were revalued at June 30, 2015 using the Dynamic Black Scholes model that computes the impact of a possible change in control transaction upon the exercise of the warrant shares at approximately $5,211,085.

F-19



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

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

Less: allocated value of Warrants
 
7,028,067

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

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

Effective conversion price
 
$
2.23

Market price
 
$
2.94

Intrinsic value per share
 
$
0.7115

Intrinsic value of beneficial conversion feature
 
$
5,737,810


F-20



NOTE 12.  SEGMENT REPORTING

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

SIX MONTHS ENDED JUNE 30, 2015
 
 
Black Oil
 
Refining &
Marketing
 
Recovery
 
Total
Revenues
 
$
59,252,510

 
$
19,714,009

 
$
7,837,531

 
$
86,804,050

 
 
 
 
 
 
 
 
 
Income (loss) from operations
 
$
(10,487,316
)
 
$
840,249

 
$
520,232

 
$
(9,126,835
)

SIX MONTHS ENDED JUNE 30, 2014
 
 
Black Oil
 
Refining &
Marketing
 
Recovery
 
Total
Revenues
 
$
72,449,922

 
$
38,345,278

 
$
8,634,080

 
$
119,429,280

 
 
 
 
 
 
 
 
 
Income (loss) from operations
 
$
1,137,078

 
$
1,538,784

 
$
(875,530
)
 
$
1,800,332


THREE MONTHS ENDED JUNE 30, 2015
 

Black Oil

Refining &
Marketing

Recovery

Total
Revenues

$
34,338,534


$
11,447,889


$
3,333,288


$
49,119,711














Income (loss) from operations

$
(2,511,824
)

$
703,384


$
90,410


$
(1,718,030
)

THREE MONTHS ENDED JUNE 30, 2014
 
 
Black Oil
 
Refining &
Marketing
 
Recovery
 
Total
Revenues
 
$
48,878,522

 
$
18,517,819

 
$
4,683,281

 
$
72,079,622

 
 
 
 
 
 
 
 
 
Income (loss) from operations
 
$
1,116,688

 
$
768,209

 
$
(1,041,152
)
 
$
843,745



F-21



NOTE 13. CONTINGENT CONSIDERATION

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

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

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

NOTE 14. SUBSEQUENT EVENTS

On July 7, 2015, the Board of Directors granted our non-executive directors options to purchase an aggregate of 300,000 shares of common stock at an exercise price of $2.08 per share (60,000 options per non-executive director), with a ten year term, vesting at the rate of 1/4th of such options per year on the first four anniversaries of the grant, under our 2013 Stock Incentive Plan in consideration for services rendered and to be rendered to the Company.

Employment Agreements

Effective on June 24, 2015, the Compensation Committee of the Board of Directors (the “Committee”) of the Company approved an increase in the yearly base salary of (a) Benjamin P. Cowart, our Chief Executive Officer and President to $425,000 (compared to $267,500 prior to such increase); and (b) Chris Carlson, our Chief Financial Officer and Secretary to $240,000 (compared to $195,000 prior to such increase)(collectively, the “Increases in Salary”).  The Committee also set the total yearly target bonuses of Mr. Cowart and Mr. Carlson at $385,000 and $240,000, respectively.  Notwithstanding the Increases in Salary, the Committee determined that such increases would not go into effect for at least 90 days because of our lack of liquidity, after which time the Committee will re-examine our liquidity position and determine whether such Increases in Salary will become effective (the “90 Day Compensation Re-Examination”).  

Effective on August 7, 2015, we entered into new employment agreements with Mr. Cowart and Mr. Carlson described in greater detail below:

Benjamin P. Cowart, Chief Executive Officer and President

On August 7, 2015, we entered into an Executive Employment Agreement with Benjamin P. Cowart, our Chief Executive Officer and President (Mr. Cowart’s prior employment agreement had expired on April 16, 2014; provided that the parties had agreed to continue operating under the terms of the prior agreement until a new agreement was entered into). The agreement, which provides for Mr. Cowart to serve as our Chief Executive Officer, has a term extending through December 31, 2018, provided that the agreement automatically extends for additional one year terms thereafter in the event neither party provides the other at least 60 days prior notice of their intention not to renew the terms of the agreement.

Pursuant to the terms of the agreement, Mr. Cowart’s annual compensation package includes (1) a base salary of $425,000 per year ($267,500 per year subject to the terms of the 90 Day Compensation Re-Examination described above), subject to annual increases as determined in the sole discretion of the Compensation Committee, and (2) a bonus payment to be determined in the sole discretion of the Compensation Committee in an annual targeted amount of not less than $385,000, subject to the compliance by Mr. Cowart with performance goals that may be established by the Compensation Committee from time to time, provided no
goals have been established to date, and that in the absence of performance goals, the amount of such bonus would be wholly determined in the discretion of the Compensation Committee. Mr. Cowart is also paid an automobile allowance of $750 per month during the term of the agreement and is eligible to participate in our stock option plan and other benefit plans.

The agreement prohibits Mr. Cowart from competing against us during the term of the agreement and for a period of twelve months after the termination of the agreement in any state and any other geographic area in which we or our subsidiaries provide Restricted Services or Restricted Products, directly or indirectly, during the twelve months preceding the date of the termination of the agreement. “Restricted Services” means the collection, trading, purchasing, processing, storing, aggregation, transportation, manufacture, distribution, recycling, storage, refinement, re-refinement and sale of Restricted Products, dismantling, demolition, decommission and marine salvage services and any other services that we or our subsidiaries have provided or are researching, developing, performing and/or providing at any time during the two years immediately preceding the date of termination, or which Mr. Cowart has obtained any trade secret or other confidential information about at any time during the two years immediately preceding the date of termination of the agreement. “Restricted Products” means used motor oil, petroleum by-products, vacuum gas oil, aggregated feedstock and re-refined oil products, gasoline blendstock, pygas and fuel oil cutterstock, oil filters, engine coolant and/or other hydrocarbons and any other product, that we or our subsidiaries have provided or are researching, developing, manufacturing, distributing, refining, re-refining, aggregating, purchasing, selling and/or providing at any time during the two years immediately preceding the date the agreement is terminated, or which Mr. Cowart obtained any trade secret or other confidential information in connection with at any time during the two years immediately preceding the date of termination of the agreement.

We may terminate Mr. Cowart’s employment (a) for “cause” (which is defined to include, a material breach of the agreement by Mr. Cowart, any act of misappropriation of funds or embezzlement by Mr. Cowart, Mr. Cowart committing any act of fraud, or Mr. Cowart being indicted of, or pleading guilty or nolo contendere with respect to, theft, fraud, a crime involving moral turpitude, or a felony under federal or applicable state law); (b) in the event Mr. Cowart suffers a physical or mental disability which renders him unable to perform his duties and obligations for either 90 consecutive days or 180 days in any 12-month period; (c) for any reason without “cause”; or (d) upon expiration of the initial term of the agreement (or any renewal) upon notice as provided above. The agreement also automatically terminates upon the death of Mr. Cowart.

Mr. Cowart may terminate his employment (a) for “good reason” (i.e., (a) if his position or duties are modified to such an extent that his duties are no longer consistent with the position of CEO of the Company, (b) there has been a material breach by us of a material term of the agreement or Mr. Cowart reasonably believes that we are violating any law which would have a material adverse effect on our operations and such violation continues uncured thirty days after such breach and after notice thereof has been provided to us by Mr. Cowart, or (c) Mr. Cowart’s compensation is reduced without his consent, or we fail to pay to Mr. Cowart any compensation due to him upon five days written notice from Mr. Cowart informing us of such failure); provided, however, prior to any such termination by Mr. Cowart for “good reason”, Mr. Cowart must first advise us in writing (within 15 days of the occurrence of such event) and provide us 15 days to cure (5 days in connection with the reduction of Mr. Cowart’s salary or the failure to pay amounts owed to him)); (b) for any reason without “good reason”; and (c) upon expiration of the initial term of the agreement (or any renewal) upon notice as provided above.

In the event that Mr. Cowart’s employment is terminated for any reason (not including, however, a termination by us for “cause” or a termination as a result of Mr. Cowart’s death or disability) during the twelve month period following a Change of Control (a “Change of Control Termination”) or in anticipation of a Change of Control, we are required to pay Mr. Cowart, within 60 days following the later of (i) the date of such Change of Control Termination; and (ii) the date of such Change of Control, a cash severance payment in a lump sum in an amount equal to 3.0 times the sum of his current base salary and the amount of the last bonus payable to Mr. Cowart (the “Change of Control Payment”), which amount is due within 60 days of the later of (i) the date of such Change of Control Termination; and (ii) the date of such Change of Control. If Mr. Cowart’s employment terminates due to a Change of Control Termination within six (6) months prior to a Change of Control, it will be deemed to be “in anticipation of a Change of Control” for all purposes. In addition, in the event of a Change of Control, all of Mr. Cowart’s equity-based compensation immediately vests to Mr. Cowart and any outstanding stock options held by Mr. Cowart can be exercised by Mr. Cowart until the earlier of (A) one (1) year from the date of termination and (B) the latest date upon which such stock options would have expired by their original terms under any circumstances, provided that if Mr. Cowart’s employment ends in anticipation of a Change of Control and such equity-based compensation awards or stock options have previously expired pursuant to their terms, the Company is required to pay Mr. Cowart a lump sum payment, payable on the same date as the Change of Control Payment, equal to the black scholes value of the expired and unexercised equity compensation awards and stock options held by Mr. Cowart on the date of termination, based on the value of such awards had they been exercisable through the end of their stated term and had not previously expired. “Change of Control” for the purposes of the agreement means: (a) any person obtaining beneficial ownership representing more than 50% of the total voting power represented by our then outstanding voting securities without the approval of not fewer than two-thirds of our Board of Directors; (b) a merger or consolidation of us whether or not

F-22



approved by our Board of Directors, other than a merger or consolidation that would result in our voting securities immediately prior thereto continuing to represent at least 50% of the total voting power outstanding immediately after such merger or consolidation, (c) our shareholders approving a plan of complete liquidation or an agreement for the sale or disposition by us of all or substantially all of our assets, or (d) as a result of the election of members to our Board of Directors, a majority of the Board of Directors consists of persons who are not members of the Board of Directors on August 7, 2015, except in the event that such slate of directors is proposed by a committee of the Board of Directors; provided that if the definition of “Change of Control” in our Stock Incentive Plans or Equity Compensation Plans is more favorable than the definition above, then such definition shall be controlling.

If Mr. Cowart’s employment is terminated pursuant to his death, disability, the end of the initial term (or any renewal term), without “good reason” by Mr. Cowart, or by us for “cause”, Mr. Cowart is entitled to all salary accrued through the termination date and no other benefits other than as required under the terms of employee benefit plans in which Mr. Cowart was participating as of the termination date. Additionally, any unvested stock options or equity compensation held by Mr. Cowart immediately terminate and are forfeited (unless otherwise provided in the applicable award) and any previously vested stock options (or if applicable equity compensation) are subject to the terms and conditions set forth in the applicable Stock Incentive Plan or Equity Compensation Plan, or award agreement, as such may describe the rights and obligations upon termination of employment of Mr. Cowart.

If Mr. Cowart’s employment is terminated by Mr. Cowart for “good reason”, or by us without “cause”, (a) Mr. Cowart is entitled to continue to receive the salary due pursuant to the terms of the agreement at the rate in effect upon the termination date for twelve (12) months following the termination date, payable in accordance with our normal payroll practices and policies; (b) Mr. Cowart is entitled to the pro rata amount of any cash bonus which would be payable to Mr. Cowart had he remained employed for an additional twelve months following the termination date; and (c) provided Mr. Cowart elects to receive continued health insurance coverage through COBRA, we are required to pay Mr. Cowart’s monthly COBRA contributions for health insurance coverage, as may be amended from time to time (less an amount equal to the premium contribution paid by active Company employees, if any) for twelve months following the termination date; provided, however, that if at any time Mr. Cowart is covered by a substantially similar level of health insurance through subsequent employment or otherwise such obligation ceases. Additionally, unvested benefits (whether equity or cash benefits and bonuses) will vest immediately upon such termination and any outstanding stock options previously granted to Mr. Cowart will vest immediately upon such termination and will be exercisable until the earlier of (A) one year from the date of termination and (B) the latest date upon which such stock options would have expired by their original terms under any circumstances.

The agreement contains standard assignment of inventions, indemnification and confidentiality provisions. Further, Mr. Cowart is subject to non-solicitation covenants during the term of the agreement.

Although Mr. Cowart will be prohibited from competing with us while he is employed with us, he will only be prohibited from competing for twelve months after his employment with us ends pursuant to the agreement, provided that Mr. Cowart is also prohibited from competing against us in connection with certain of our operations until August 17, 2017, pursuant to a prior Non-Competition and Non-Solicitation Agreement entered into with Mr. Cowart.

Chris Carlson, Chief Financial Officer and Secretary

On August 7, 2015, we entered into an Executive Employment Agreement with Chris Carlson, our Chief Financial Officer and Secretary (Mr. Carlson’s prior employment agreement had expired on April 1, 2015; provided that the parties had agreed to continue operating under the terms of the prior agreement until a new agreement was entered into). The agreement, which provides for Mr. Carlson to serve as our Chief Financial Officer, has a term extending through December 31, 2018, provided that the agreement automatically extends for additional one year terms thereafter in the event neither party provides the other at least 60 days prior notice of their intention not to renew the terms of the agreement.

Pursuant to the terms of the agreement, Mr. Carlson’s annual compensation package includes (1) a base salary of $240,000 per year ($195,000 per year subject to the terms of the 90 Day Compensation Re-Examination described above), subject to annual increases as determined in the sole discretion of the Compensation Committee, and (2) a bonus payment to be determined in the sole discretion of the Compensation Committee in an annual targeted amount of not less than $240,000, subject to the compliance by Mr. Carlson with performance goals that may be established by the Compensation Committee from time to time, provided no goals have been established to date, and that in the absence of performance goals, the amount of such bonus would be wholly determined in the discretion of the Compensation Committee. Mr. Carlson is also paid an automobile allowance of $750 per month during the term of the agreement and is eligible to participate in our stock option plan and other benefit plans.


F-23



The agreement prohibits Mr. Carlson from competing against us during the term of the agreement and for a period of twelve months after the termination of the agreement in any state and any other geographic area in which we or our subsidiaries provide Restricted Services or Restricted Products, directly or indirectly, during the twelve months preceding the date of the termination of the agreement. “Restricted Services” means the collection, trading, purchasing, processing, storing, aggregation, transportation, manufacture, distribution, recycling, storage, refinement, re-refinement and sale of Restricted Products, dismantling, demolition, decommission and marine salvage services and any other services that we or our subsidiaries have provided or are researching, developing, performing and/or providing at any time during the two years immediately preceding the date of termination, or which Mr. Carlson has obtained any trade secret or other confidential information about at any time during the two years immediately preceding the date of termination of the agreement. “Restricted Products” means used motor oil, petroleum by-products, vacuum gas oil, aggregated feedstock and re-refined oil products, gasoline blendstock, pygas and fuel oil cutterstock, oil filters, engine coolant and/or other hydrocarbons and any other product, that we or our subsidiaries have provided or are researching, developing, manufacturing, distributing, refining, re-refining, aggregating, purchasing, selling and/or providing at any time during the two years immediately preceding the date the agreement is terminated, or which Mr. Carlson obtained any trade secret or other confidential information in connection with at any time during the two years immediately preceding the date of termination of the agreement.

We may terminate Mr. Carlson’s employment (a) for “cause” (which is defined to include, a material breach of the agreement by Mr. Carlson, any act of misappropriation of funds or embezzlement by Mr. Carlson, Mr. Carlson committing any act of fraud, or Mr. Carlson being indicted of, or pleading guilty or nolo contendere with respect to, theft, fraud, a crime involving moral turpitude, or a felony under federal or applicable state law); (b) in the event Mr. Carlson suffers a physical or mental disability which renders him unable to perform his duties and obligations for either 90 consecutive days or 180 days in any 12-month period; (c) for any reason without “cause”; or (d) upon expiration of the initial term of the agreement (or any renewal) upon notice as provided above. The agreement also automatically terminates upon the death of Mr. Carlson.

Mr. Carlson may terminate his employment (a) for “good reason” (i.e., (a) if his position or duties are modified to such an extent that his duties are no longer consistent with the position of CFO of the Company, (b) there has been a material breach by us of a material term of the agreement or Mr. Carlson reasonably believes that we are violating any law which would have a material adverse effect on our operations and such violation continues uncured thirty days after such breach and after notice thereof has been provided to us by Mr. Carlson, or (c) Mr. Carlson’s compensation is reduced without his consent, or we fail to pay to Mr. Carlson any compensation due to him upon five days written notice from Mr. Carlson informing us of such failure); provided, however, prior to any such termination by Mr. Carlson for “good reason”, Mr. Carlson must first advise us in writing (within 15 days of the occurrence of such event) and provide us 15 days to cure (5 days in connection with the reduction of Mr. Carlson’s salary or the failure to pay amounts owed to him)); (b) for any reason without “good reason”; and (c) upon expiration of the initial term of the agreement (or any renewal) upon notice as provided above.

In the event that Mr. Carlson’s employment is terminated for any reason (not including, however, a termination by us for “cause” or a termination as a result of Mr. Carlson’s death or disability) during the twelve month period following a Change of Control (a “Change of Control Termination”) or in anticipation of a Change of Control, we are required to pay Mr. Carlson, within 60 days following the later of (i) the date of such Change of Control Termination; and (ii) the date of such Change of Control, a cash severance payment in a lump sum in an amount equal to 3.0 times the sum of his current base salary and the amount of the last bonus payable to Mr. Carlson (the “Change of Control Payment”), which amount is due within 60 days of the later of (i) the date of such Change of Control Termination; and (ii) the date of such Change of Control. If Mr. Carlson’s employment terminates due to a Change of Control Termination within six (6) months prior to a Change of Control, it will be deemed to be “in anticipation of a Change of Control” for all purposes. In addition, in the event of a Change of Control, all of Mr. Carlson’s equity-based compensation immediately vests to Mr. Carlson and any outstanding stock options held by Mr. Carlson can be exercised by Mr. Carlson until the earlier of (A) one (1) year from the date of termination and (B) the latest date upon which such stock options would have expired by their original terms under any circumstances, provided that if Mr. Carlson’s employment ends in anticipation of a Change of Control and such equity-based compensation awards or stock options have previously expired pursuant to their terms, the Company is required to pay Mr. Carlson a lump sum payment, payable on the same date as the Change of Control Payment, equal to the black scholes value of the expired and unexercised equity compensation awards and stock options held by Mr. Carlson on the date of termination, based on the value of such awards had they been exercisable through the end of their stated term and had not previously expired. “Change of Control” for the purposes of the agreement means: (a) any person obtaining beneficial ownership representing more than 50% of the total voting power represented by our then outstanding voting securities without the approval of not fewer than two-thirds of our Board of Directors; (b) a merger or consolidation of us whether or not approved by our Board of Directors, other than a merger or consolidation that would result in our voting securities immediately prior thereto continuing to represent at least 50% of the total voting power outstanding immediately after such merger or consolidation, (c) our shareholders approving a plan of complete liquidation or an agreement for the sale or disposition by us of all or substantially all of our assets, or (d) as a result of the election of members to our Board of Directors, a majority of the Board

F-24



of Directors consists of persons who are not members of the Board of Directors on August 7, 2015, except in the event that such slate of directors is proposed by a committee of the Board of Directors; provided that if the definition of “Change of Control” in our Stock Incentive Plans or Equity Compensation Plans is more favorable than the definition above, then such definition shall be controlling.

If Mr. Carlson’s employment is terminated pursuant to his death, disability, the end of the initial term (or any renewal term), without “good reason” by Mr. Carlson, or by us for “cause”, Mr. Carlson is entitled to all salary accrued through the termination date and no other benefits other than as required under the terms of employee benefit plans in which Mr. Carlson was participating as of the termination date. Additionally, any unvested stock options or equity compensation held by Mr. Carlson immediately terminate and are forfeited (unless otherwise provided in the applicable award) and any previously vested stock options (or if applicable equity compensation) are subject to the terms and conditions set forth in the applicable Stock Incentive Plan or Equity Compensation Plan, or award agreement, as such may describe the rights and obligations upon termination of employment of Mr. Carlson.

If Mr. Carlson’s employment is terminated by Mr. Carlson for “good reason”, or by us without “cause”, (a) Mr. Carlson is entitled to continue to receive the salary due pursuant to the terms of the agreement at the rate in effect upon the termination date for twelve (12) months following the termination date, payable in accordance with our normal payroll practices and policies; (b) Mr. Carlson is entitled to the pro rata amount of any cash bonus which would be payable to Mr. Carlson had he remained employed for an additional twelve months following the termination date; and (c) provided Mr. Carlson elects to receive continued health insurance coverage through COBRA, we are required to pay Mr. Carlson’s monthly COBRA contributions for health insurance coverage, as may be amended from time to time (less an amount equal to the premium contribution paid by active Company employees, if any) for twelve months following the termination date; provided, however, that if at any time Mr. Carlson is covered by a substantially similar level of health insurance through subsequent employment or otherwise, such obligation ceases. Additionally, unvested benefits (whether equity or cash benefits and bonuses) will vest immediately upon such termination and any outstanding stock options previously granted to Mr. Carlson will vest immediately upon such termination and will be exercisable until the earlier of (A) one year from the date of termination and (B) the latest date upon which such stock options would have expired by their original terms under any circumstances.

The agreement contains standard assignment of inventions, indemnification and confidentiality provisions. Further, Mr. Carlson is subject to non-solicitation covenants during the term of the agreement.

Although Mr. Carlson will be prohibited from competing with us while he is employed with us, he will only be prohibited from competing for twelve months after his employment with us ends pursuant to the agreement, provided that Mr. Carlson is also prohibited from competing against us in connection with certain of our operations until August 17, 2017, pursuant to a prior Non-Competition and Non-Solicitation Agreement entered into with Mr. Carlson.

Aaron Oil Acquisition

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


F-25



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

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

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

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

1



our ability to acquire and construct new facilities;
certain events of default which have occurred under our debt facilities and previously been waived;
prohibitions on borrowing and other covenants of our debt facilities;
our ability to effectively manage our growth;
repayment of and covenants in our debt facilities;
the lack of capital available on acceptable terms to finance our continued growth; and
other risk factors included under “Risk Factors” below and in our Annual Report on Form 10-K and prior Form 10-Qs.

You should read the matters described in “Risk Factors” below and disclosed in the Company’s Annual Report on Form 10-K/A, filed with the Commission on April 15, 2015 and the other cautionary statements made in this Report as being applicable to all related forward-looking statements wherever they appear in this Report. We cannot assure you that the forward-looking statements in this Report will prove to be accurate and therefore prospective investors are encouraged not to place undue reliance on forward-looking statements. Other than as required by law, we undertake no obligation to update or revise these forward-looking statements, even though our situation may change in the future.

Please see the “Glossary of Selected Terms” incorporated by reference hereto as Exhibit 99.1, for a list of abbreviations and definitions used throughout this Report.

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

Corporate History of the Registrant:

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

Material Acquisitions

Effective as of August 31, 2012, we acquired 100% of the outstanding equity interests of Vertex Acquisition Sub, LLC (“Acquisition Sub”), a special purpose entity consisting of substantially all of the assets of Holdings and real-estate properties of B & S Cowart Family L.P. (“B&S LP” and the “Acquisition”), both of which entities were owned and operated by related parties.  Prior to closing the Acquisition, Holdings contributed to Acquisition Sub substantially all of its assets and liabilities relating to the business of transporting, storing, processing and re-refining petroleum products, crudes and used lubricants, including all of the outstanding equity interests in Holdings’ wholly-owned operating subsidiaries, Cedar Marine Terminals, L.P. (“CMT”), Crossroad Carriers, L.P. (“Crossroad”), Vertex Recovery, L.P. (“Vertex Recovery”) and H&H Oil, L.P. (“H&H Oil”, and collectively, the “Transferred Partnerships”), and B&S LP contributed real estate associated with the operations of H&H Oil.

We paid the following consideration for 100% of the equity interests in Acquisition Sub (i) to Holdings, (a) $14.8 million
in cash and assumed debt; and (b) 4,545,455 million restricted shares of our common stock; and (ii) to B&S LP, $1.7 million cash consideration, representing the appraised value of certain real estate contributed by B&S LP to Acquisition Sub. Additionally, for each of the three one-year periods following September 11, 2012, Holdings will be eligible to receive earn-out payments of $2.23 million, up to $6.7 million in the aggregate, contingent on the combined company achieving adjusted EBITDA targets of $10.75

2



million, $12.0 million and $13.5 million, respectively, in those periods. The first and second earn-out targets for the one year periods ending September 11, 2013 and 2014, respectively, were not met and as such no earn-out payments were paid for such two periods. The Company has also determined that the 2015 target (for year three) will also not be met. As such, no earn-out payments will be due or made pursuant to the terms of the Acquisition.

We had numerous relationships and related-party transactions with Holdings and its subsidiaries prior to the closing of the Acquisition, including the lease of a storage facility, the subletting of office space, and agreements to operate the Thermal Chemical Extraction Process ("TCEP") (described below) facility and to transport and store feedstock and end products. The closing of the Acquisition eliminated these related-party transactions.  The description of our operations below reflects the closing of the Acquisition, unless otherwise stated or the discussion requires otherwise.

E-Source

Effective October 1, 2013, Vertex acquired a 51% interest in E-Source Holdings, LLC (“E-Source”), a company that leases and operates a facility located in Houston, Texas, and provides dismantling, demolition, decommission and marine salvage services at industrial facilities throughout the Gulf Coast. E-Source also owns and operates a fleet of trucks and other vehicles used for shipping and handling equipment and scrap materials. The assets and operations of E-Source fall under our Recovery division.

The consideration paid for the acquisition of E-Source was approximately $900,000 and the right of one of the sellers (the “Earn-Out Seller”) to earn additional earn-out payments of up to 15% of E-Source’s net income before taxes, in the event certain calendar year net income thresholds are met, in calendar years 2014 through 2017, as well as a commission of 20% of the net income before taxes associated with certain future planned projects of E-Source required to be completed prior to December 31, 2014, as long as such applicable seller remains an employee of E-Source during such applicable periods. Effective on March 14, 2014, we entered into an amendment to our acquisition agreement with the Earn-Out Seller, and mutually agreed that the lesser of (a) 20% and (b) $100,000, per calendar year of earn-out payments due the Earn-Out Seller, if any, would be payable in shares of our restricted common stock, based on the average of the five closing sales prices of the Company’s common stock on the first five trading days of each applicable calendar year (each a “Valuation”) for which the earn-out consideration relates, provided that the parties mutually agreed to use a valuation of $3.2922 per share (the “2014 Valuation Price”) for any earn-out payments relating to the 2014 calendar year and further agreed that in no event would any future calendar year Valuation be less than the 2014 Valuation Price. A total of $136,662 of earn-out payments was made to the E-Source Seller in 2014 (all in cash), however, no additional payments are due in connection with the earn-out as E-Source's management has subsequently resigned and forfeited all remaining earn-out payments.

Effective January 1, 2014, the Company purchased an additional 19% ownership interest in E-Source. In consideration for the additional interest, the Company paid $854,050 of which $200,000 was paid on April 11, 2014 and the remainder was paid monthly in $72,672 installments through December 31, 2014. The balance of $145,344 was paid on January 23, 2015. On September 4, 2014, the Company acquired the remaining 30% interest in E-Source, of which it had previously acquired 70%. In consideration for the 30% interest, the Company issued 207,743 shares of common stock, valued at approximately $1,790,745. As a result of the acquisitions, the Company owned 100% of E-Source as of September 4, 2014 and continued to own 100% of E-Source through the date of this report.

Omega Acquisition

On May 2, 2014, we completed the Initial Closing (defined below) contemplated under that certain Asset Purchase Agreement entered into on March 17, 2014, and amended by the First Amendment dated April 14, 2014, Second Amendment dated April 30, 2014, Third Amendment dated May 2, 2014, and Fourth Amendment dated January 19, 2015 (as amended to date, the “Omega Purchase Agreement”) by and among the Company, Vertex Refining LA, LLC and Vertex Refining NV, LLC (“Vertex Refining Nevada”), both wholly-owned subsidiaries of Vertex Energy Operating, LLC, our wholly-owned subsidiary (“Vertex Operating”), Louisiana LV OR LLC f/k/a Omega Refining, LLC (“Omega Refining”), Bango Refining NV, LLC (“Bango Refining”) and Omega Holdings Company LLC (“Omega Holdings” and collectively with Omega Refining and Bango Refining, “Omega” or the “sellers”).

Pursuant to the Omega Purchase Agreement, we agreed to acquire certain of Omega’s assets related to (1) the operation of oil re-refineries and, in connection therewith, purchasing used lubricating oils and re-refining such oils into processed oils and other products for the distribution, supply and sale to end-customers and (2) the provision of related products and support services. Specifically, the assets included Omega’s Marrero, Louisiana and Bango, Nevada, re-refineries (which re-refine approximately 80 million gallons of used motor oil per year). Additionally, the Marrero, Louisiana plant produces vacuum gas oil (VGO) and the Bango, Nevada plant produces base lubricating oils. Omega also operated Golden State Lubricants Works, LLC (“Golden State”), a strategic blending and storage facility located in Bakersfield, California, which we acquired in the acquisition. In connection with the acquisition, we also acquired certain of Omega’s prepaid assets and inventory.

3




The acquisition was to close in two separate closings, the first of which relating to the acquisition of Omega Refining (including the Marrero, Louisiana re-refinery and Omega’s Myrtle Grove complex in Belle Chasse, Louisiana) and ownership of Golden State, as described above (the “Acquired Business”), closed on May 2, 2014 (the “Initial Closing”), and the second of which relating to the acquisition of Bango Refining and the Bango, Nevada plant, was planned to close thereafter, subject to certain closing conditions being met prior to closing (the “Final Closing”).

The purchase price paid at the Initial Closing was $30,750,000 in cash, 500,000 shares of our restricted common stock (valued at approximately $4 million) and the assumption of certain capital lease obligations and other liabilities relating to contracts and leases of Omega Refining in connection with the Initial Closing. We also agreed to provide Omega a loan in the amount of up to approximately $13.8 million (described below).

The amount due at the Final Closing, in consideration for the acquisition of Bango Refining, was agreed to be the assumption of certain loans made pursuant to the Omega Secured Note (described below), the issuance of 1,500,000 shares of our common stock of which 650,000 shares (with an agreed value of $3.2301 per share or approximately $2.1 million) were to be held in escrow (the “Pledged Shares”) and used to satisfy indemnification claims and secure the repayment of the Omega Secured Note (defined below), and which amount was subject to adjustment in the event minimum inventory levels were not delivered at the Final Closing, and the assumption of certain capital lease obligations and other liabilities relating to contracts and leases of Bango Refining. A portion of the Pledged Shares are to be released from escrow, subject to outstanding claims, on September 15, 2015, and the remainder were to be released on the 18 month anniversary of the Final Closing. Subject to certain negotiated exceptions for excluded liabilities, taxes and other fundamental items, the sellers’ indemnification obligations are capped at $5 million. Vertex's obligation to consummate the Final Closing was subject to among other things, compliance with certain provisions of the credit agreements described herein and that the Bango plant operated by Bango Refining be fully restored and operational, as well as the plant meeting certain used motor oil processing run rates and that there are no adverse claims or legal proceedings related to an accident that occurred at the Bango plant in December 2013.

The required closing date of the Final Closing was extended by the parties until January 31, 2015, provided that such Final Closing failed to occur by such date, and on February 25, 2015, we provided Omega Refining, Bango Refining, and Omega Holdings, formal notice of the termination of the Company's rights to complete the Final Closing. Notwithstanding the above, neither party is relieved of any of their obligations under the Omega Purchase Agreement in connection with the Initial Closing nor the transactions contemplated thereby, including the Company's obligation to make contingent payments and their respective indemnification obligations.

In connection with the Initial Closing, Omega Refining and Bango Refining provided Vertex Refining Nevada a Secured Promissory Note (the “Omega Secured Note”) in the aggregate amount of $13,858,067, representing (a) a loan to Omega in the amount of approximately $7.56 million (representing the agreed upon value of the amount by which the consideration paid at the Initial Closing (which included consideration relating to the assets acquired at the Initial Closing and which were planned to be acquired at the Final Closing) exceeded the value of assets acquired at the Initial Closing) (the “Purchase Price Loan”); (b) a $750,000 loan related to the delivery of a certain amount of used motor oil inventory at the Initial Closing (the “First Inventory Loan”); (c) a $1,400,000 loan related to the delivery of a certain amount of used motor oil inventory planned to be delivered at the Final Closing (the “Second Inventory Loan” and along with the First Inventory Loan, the “Inventory Loans”); (d) a loan in a single advance of $3.15 million to satisfy accounts payable and other working capital related obligations of Omega after the Initial Closing, provided an additional $1 million in loans were made in fiscal 2015, raising the amount of such working capital advances to $4.15 million (the “Draw Down Loan”) and (e) an additional loan of up to $1 million for capital expenditures, if mutually approved by us and Omega (the “Capital Expenditure Loan”). The Purchase Price Loan and the Draw Down Loan bear interest at the short-term federal rate as published by the Internal Revenue Service from time to time (currently 0.33% per annum) prior to October 30, 2014, and thereafter at 9.5% per annum, payable monthly in arrears and have a maturity date of March 31, 2015. The First Inventory Loan and the Draw Down Loan accrue interest at the rate of 9.5% per annum beginning on May 31, 2014, and were due and payable on March 31, 2015. Upon an event of default under any of the loans, the loans accrue interest at 18% per annum until paid in full. The Purchase Price Loan and the Draw Down Loan were due and payable in full on March 31, 2015, and were not paid on such date and are currently in default.

The repayment of the Omega Secured Note is guaranteed by Omega Holdings pursuant to a Guaranty Agreement and secured by a security interest granted pursuant to the terms of the Omega Secured Note and a Leasehold Deed of Trust, Security Agreement, Assignment of Leases and Rents and Fixture Filing. Additionally, we have the right to set-off any amount due upon an event of default against certain of the Pledged Shares (if any) and the earn-out consideration described below (provided that we have determined that no earn-out payments will be due), subject to the terms of a Pledge Agreement and the Omega Purchase Agreement.

The assets and operations acquired from Omega fall under our Black Oil division, as described below.

4







Heartland Acquisition

On December 5, 2014 (the “Closing”), we closed the transactions contemplated by the October 21, 2014 Asset Purchase Agreement by and among the Company; Vertex Refining OH, LLC (“Vertex OH”), a wholly-owned subsidiary of Vertex Operating; Vertex Operating and Warren Ohio Holdings Co., LLC. f/k/a Heartland Group Holdings, LLC (“Heartland”), as amended by the First Amendment to Purchase Agreement dated November 26, 2014 the Second Amendment to Purchase Agreement dated December 5, 2014 and the Third Amendment to Purchase Agreement dated March 4, 2015 (the Asset Purchase Agreement as amended by the First Amendment, Second Amendment, and Third Amendment, the “Heartland Purchase Agreement”).

In connection with the Closing, we acquired substantially all of the assets of Heartland related to and used in an oil re-refinery and, in connection with the collecting, aggregating and purchasing of used lubricating oils and the re-refining of such oils into processed oils and other products for the distribution, supply and sale to end-customers, including raw materials, finished products and work-in-process, equipment and other fixed assets, customer lists and marketing information, the name ‘Heartland’ and other related trade names, Heartland’s real property relating to its used oil refining facility located in Columbus, Ohio, used oil storage and transfer facilities located in Columbus, Zanesville and Norwalk, Ohio (provided that the acquisition of the Norwalk, Ohio location is subject to the terms and conditions of the Second Amendment), and leases related to storage and transfer facilities located in Zanesville, Ohio, Mount Sterling, Kentucky, and Ravenswood, West Virginia (collectively, the “Heartland Assets”) and assumed certain liabilities of Heartland associated with certain assumed and acquired agreements (collectively, the “Acquired Business”). The main assets excluded from the purchased assets pursuant to the Heartland Purchase Agreement were Heartland’s cash and cash equivalents, receivables, certain prepaid expenses, refunds and related claims, rights to certain tax refunds, and certain assets used in the operations of Heartland which are used more than incidentally by Heartland’s majority equity owner (Warren Distribution, Inc. (“Warren”)) in connection with the operation of its other businesses and certain real property.

The purchase price paid in consideration for the Heartland Assets was the assumption of the assumed liabilities and an aggregate of 2,257,467 shares of restricted common stock (the “Heartland Shares”), representing a total of 1,189,637 shares valued at $8,276,792, as agreed pursuant to the terms of the original Heartland Purchase Agreement, 303,957 shares which were due in consideration for the purchase of various inventory of Heartland acquired by the Company at the closing in connection with the Inventory Purchase (described below), valued at $882,285, and a total of 763,873 shares due in consideration for the Reimbursement of Operating Losses (described below). A total of 150,000 shares of restricted common stock issued at Closing are being held in escrow and will be used to satisfy indemnification claims (the “Escrow Shares”). Pursuant to the Heartland Purchase Agreement, the parties agreed to a true up of the inventory of the Acquired Business sixty days after the Closing (February 3, 2015). Pursuant to the true up, any additional amount owed by the Company to Heartland for inventory at Closing (less amounts already paid for at Closing) was to be paid in shares of the Company’s restricted common stock, based on the volume weighted average prices of the Company’s common stock on the NASDAQ Capital Market on the ten (10) trading days immediately prior to Closing, which totaled $3.56. An aggregate of an additional $200,000 was owed to Heartland in connection with the inventory true-up and as such, we issued Heartland an additional 56,180 shares of restricted common stock ($200,000 divided by $3.56).

Pursuant to a Consulting Agreement previously entered into with Heartland in July 2014, Vertex Operating agreed to provide consulting services to Heartland while the parties negotiated the definitive terms of the Heartland Purchase Agreement (the “Consulting Agreement”), and to reimburse Heartland for its operating losses (on a cash basis net of interest, depreciation, corporate overhead expenses and insurance proceeds received), which totaled $2,716,561 as of closing (the “Reimbursement for Operating Losses”).

Heartland also has the right pursuant to the terms of the Heartland Purchase Agreement to earn additional earn-out consideration of up to a maximum of $8,276,792, based on total EBITDA related to the Heartland Business during the twelve month period beginning on January 1, 2016 (the "Earnout Period"), as follows (as applicable, the "Contingent Payment"):


EBITDA generated during Earnout Period
Contingent Payment Due
Less than $1,650,000
$0
At least $1,650,000
$4,138,396
More than $1,650,000 and less than $3,300,000
Pro-rated between $4,138,396 and $8,276,792
$3,300,000 or more
$8,276,792

5




Any Contingent Payment due is payable 50% in cash and 50% in shares of the Company’s common stock based on VWAP commencing on the trading day immediately following the last day of the Earnout Period and ending on such tenth trading day thereafter. Additionally, the amount of any Contingent Payment is reduced by two-thirds of the cumulative total of required capital expenditures incurred at Heartland’s refining facility in Columbus, Ohio, which are paid or funded by Vertex OH after the Closing, not to exceed $866,667, which capital expenditures are estimated to total $1.3 million in aggregate.

Notwithstanding the above, the maximum number of shares of common stock to be issued pursuant to the Heartland Purchase Agreement (including shares sold in connection with certain Subscription Agreements entered into with trusts beneficially owned by our Chief Executive Officer on or around the same date) cannot (i) exceed 19.9% of the outstanding shares of common stock outstanding on October 21, 2014, (ii) exceed 19.9% of the combined voting power of the Company on October 21, 2014, or (iii) otherwise exceed such number of shares of common stock that would violate applicable listing rules of the NASDAQ Stock Market in the event the Company’s stockholders do not approve the issuance of such shares (the “Share Cap”). In the event the number of shares to be issued exceeds the Share Cap, then Vertex OH is required to instead pay any such additional consideration in cash or obtain the approval of the Company’s stockholders under applicable rules and requirements of the NASDAQ Capital Market for the additional issuance of shares.

Additionally, we were required to file a registration statement within 135 days of the closing registering all of the shares of the Company's common stock issued to Heartland as of such filing date and use commercially reasonable efforts to obtain effectiveness of the registration statement within 30 days of the filing date if the SEC did not review the registration statement or within 105 days of the filing date if the SEC did review the registration statement filing, provided that we were unable to meet such effectiveness deadlines. Notwithstanding our failure to meet the required effectiveness deadlines, we have filed a registration statement to register the shares issued to Heartland to date, and to date Heartland has not asserted any damages against us for our failure to meet such registration deadlines. Pursuant to the Purchase Agreement, Heartland agreed to not sell more than 50,000 shares of the Company's common stock issued to it each week, if otherwise permitted pursuant to applicable law and regulation.

The assets and operations acquired from Heartland fall under our Black Oil division as described below.

Recent Events:

On April 27, 2015, we dismissed LBB & Associates Ltd., LLP and engaged Hein & Associates LLP as our independent registered public accounting firm through and with the approval and recommendation of our Board of Directors and Audit Committee.

Churchill County, Nevada Lease

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

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

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


6



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

The Bango Lease also includes a purchase option, whereby, if no event of default exists on the Bango Lease, we have the option at any time during the term of the lease to purchase all of the equity interests of Bango Oil (the “Purchase Option”), effectively acquiring ownership of the Bango Plant. The initial consideration due to Bango Oil in connection with the Purchase Option is $8.5 million, provided that if the Purchase Option is not exercised by us prior to August 31, 2015, the amount due increases by $125,000 per month until July 1, 2016, and $3,000 per month thereafter, up to a maximum of $13 million, assuming we make timely rental payments under the lease (in the event we fail to timely make any rental payment due, the monthly increase in the purchase price for such applicable month increases by an additional $122,000).
 
We also continue to maintain a first priority security interest in certain personal property of Omega used at the plant pursuant to our prior agreements with Omega (which property we lease pursuant to the Personal Property Leases described below). In the event we obtain title to such property which secures the repayment of the Omega Secured Note through a foreclosure, we agreed to transfer certain assets which constitute fixtures to Bango Oil upon the termination of the Bango Lease, unless such termination is due to us exercising our rights under the Purchase Option. Notwithstanding the above, Vertex Refining Nevada entered into a Personal Property Lease with Omega Refining and Bango Refining, both related parties of Omega on April 30, 2015 (the “Personal Property Lease”), whereby Vertex Refining Nevada agreed to lease all machinery, equipment and other tangible personal property located at the Bango Plant from Omega Refining and Bango Refining, for $220,000 per month, provided that until the Omega Secured Note is paid in full, Vertex Refining Nevada is able to accrue such payments and set them off against the amount due under the Omega Secured Note. The Personal Property Lease terminates after 60 days unless Vertex Refining Nevada provides notice of its intent to renew for an additional 30 days. It is anticipated that Vertex Refining Nevada will acquire the leased personal property from Omega Refining and Bango Refining at the termination of the Personal Property Lease pursuant to Article 9 of the Uniform Commercial Code, with such acquisition occurring through an offset of a portion of the amount due Vertex Refining under the Omega Secured Note.

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

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

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


7



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

Unit Offering

On June 24, 2015, we closed the transactions contemplated by the June 19, 2015 Unit Purchase Agreement (the “Purchase Agreement”) we entered into with certain institutional investors (the “Investors”), pursuant to which the Company sold the Investors an aggregate of 8,064,534 units (the “Units”), each consisting of (i) one share of Series B Preferred Stock (described below) and (ii) one warrant to purchase one-half of a share of common stock of the Company (each a “Warrant” and collectively, the “Warrants”). The Units were sold at a price of $3.10 per Unit (the “Unit Price”) (a 6.1% premium to the closing bid price of the Company’s common stock on the NASDAQ Capital Market on the date the Purchase Agreement was entered into which was $2.91 per share (the “Closing Bid Price”)). The Warrants have an exercise price of $2.92 per share ($0.01 above the Closing Bid Price). Total gross proceeds from the offering of the Units (the “Offering”) were $25.0 million.

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

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

We used the net proceeds from the Offering to repay amounts owed under our senior credit facility with Goldman in the amount of $15.1 million and plan to use the remaining proceeds for general corporate and working capital purposes. Pursuant to the terms of the Common Stock Purchase Warrant dated March 26, 2015 (as amended and modified to date the “Lender Warrant”) which we previously granted to Goldman, Sachs & Co., an affiliate of Goldman (the “Holder”), which provided the Holder the right to purchase up to 1,766,874 shares of our common stock (as described in greater detail in the Current Reports on Form 8-K which we filed with the Securities and Exchange Commission on March 31, 2015 and June 19, 2015), such Lender Warrant and rights thereunder were cancelled and terminated in connection with our payment of the $15.1 million to Goldman as described above.
 
In addition, under the Purchase Agreement, the Company has agreed to register the shares of common stock issuable upon conversion of the Series B Preferred Stock and upon exercise of the Warrants under the Securities Act of 1933, as amended, for resale by the Investors. The Company has committed to file a registration statement on Form S-1 by the 30th day following the closing of the Offering and to cause the registration statement to become effective by the 90th day following the closing (or, in the event of a “full review” by the Securities and Exchange Commission, the 120th day following the closing), which registration statement was declared effective by the Securities and Exchange Commission on August 6, 2015. The Purchase Agreement provides for liquidated damages upon the occurrence of certain events, including, but not limited to, the failure by the Company to cause the registration statement to become effective by the deadlines set forth above. The amount of the liquidated damages is 1.0% of the aggregate subscription amount paid by an Investor for the Units affected by the event that are still held by the Investor upon the occurrence of the event, due on the date immediately following the event that caused such failure (or the 30th day following such event if the event relates to the suspension of the registration statement as described in the Purchase Agreement), and each 30 days thereafter, with such payments to be prorated on a daily basis during each 30 day period, subject to a maximum of an aggregate of 6% per annum.
 
Under the Purchase Agreement, the Company has agreed to indemnify the Investors for liabilities arising out of or relating to (i) any untrue statement of a material fact contained in the registration statement, (ii) any inaccuracy in the representations and warranties of the Company contained in the Purchase Agreement or the failure of the Company to perform its obligations under the Purchase Agreement and (iii) any failure by the Company to fulfill any undertaking included in the registration statement, subject to certain exceptions. The Investors, severally, and not jointly agreed to indemnify the Company against (i) any failure by

8



such Investor to comply with the covenants and agreements contained in the Purchase Agreement and (ii) any untrue statement of a material fact contained in the registration statement to the extent such untrue statement was made in reliance upon and in conformity with written information furnished by or on behalf of that Investor specifically for use in preparation of the registration statement, subject to certain exceptions.

The Company agreed pursuant to the Purchase Agreement, that until 60 days following effectiveness of the registration statement filed to register the shares of common stock underlying the Series B Preferred Stock and Warrants (the “Lock-Up Period”), to not offer or sell any common stock or securities convertible or exercisable into common stock, except pursuant to certain exceptions described in the Purchase Agreement, and each of the Company’s officers and directors agreed to not sell or offer for sale any shares of common stock until the end of the Lock-Up Period, subject to certain exceptions.

Series B Preferred Stock

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

The Series B Preferred Stock accrues a dividend, payable quarterly in arrears (based on calendar quarters), in the amount of 6% per annum of the original issuance price of the Series B Preferred Stock ($3.10 per share or $25.0 million in aggregate).

The dividend is payable by the Company, at the Company’s election, in registered common stock of the Company (if available) or cash. In the event dividends are paid in registered common stock of the Company, the number of shares payable will be calculated by dividing (a) the accrued dividend by (b) 90% of the arithmetic average of the volume weighted average price (VWAP) of the Company’s common stock for the 10 trading days immediately prior to the applicable date of determination (the “Dividend Stock Payment Price”). Notwithstanding the foregoing, in no event may the Company pay dividends in common stock unless the applicable Dividend Stock Payment Price is above $2.91. If the Company is prohibited from paying the dividend in cash (due to contractual senior credit agreements or other restrictions) or is unable to pay the dividend in registered common stock, the dividend will be paid in kind in Series B Preferred Stock shares at $3.10 per share.
 
The Series B Preferred Stock includes a liquidation preference (in the amount of $3.10 per share) which is junior to the Company’s previously outstanding shares of preferred stock, senior credit facilities and other debt holders as provided in further detail in the Designation.

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

The Series B Preferred Stock votes together with the common stock on an as-converted basis, provided that each holder’s voting rights are subject to and limited by the Beneficial Ownership Limitation described below.

The Company has the option to redeem the outstanding shares of Series B Preferred Stock at $3.10 per share, plus any accrued and unpaid dividends on such Series B Preferred Stock redeemed, at any time beginning on June 24, 2017, and the Company is required to redeem the Series B Preferred Stock at $3.10 per share, plus any accrued and unpaid dividends, on June 24, 2020. Notwithstanding either of the foregoing, the Series B Preferred Stock may not be redeemed unless and until amounts outstanding under the Company’s senior credit facility have been paid in full.

The Series B Preferred Stock contains a provision prohibiting the conversion of such Series B Preferred Stock into common stock of the Company, if upon such conversion, the holder thereof would beneficially own more than 9.999% of the Company’s then outstanding common stock (the “Beneficial Ownership Limitation”). The Beneficial Ownership Limitation does not apply to forced conversions undertaken by the Company pursuant to the terms of the Designation (summarized above). In addition to the Beneficial Ownership Limitation, certain of the Investors also entered into agreements with us to limit their ability to effect conversions of Series B Preferred Stock (and exercise of Warrants (defined below)), to prohibit them contractually from converting (or exercising) such applicable security if upon such conversion (or exercise) they would beneficially own more than 4.999% of our outstanding common stock.

9




Description of Business Activities:

We are an environmental services company that recycles industrial waste streams and off-specification commercial chemical products. Our primary focus is recycling used motor oil and other petroleum by-products. We are engaged in operations across the entire petroleum recycling value chain including collection, aggregation, transportation, storage, refinement, and sales of aggregated feedstock and re-refined products to end users. We operate in three divisions- the Black Oil, Refining and Marketing and Recovery divisions. Our Black Oil division collects and purchases used motor oil directly from third-party generators, aggregates used motor oil from an established network of local and regional collectors, and sells used motor oil to our customers for use as a feedstock or replacement fuel for industrial burners. Our Refining and Marketing division aggregates and manages the re-refinement of used motor oil and other petroleum by-products and sells the re-refined products to end customers. Our Recovery division is a generator solutions company for the proper recovery and management of hydrocarbon streams. We operate a refining facility that uses our proprietary TCEP technology and we also utilize third-party processing facilities.

We recently acquired a 100% interest in E-Source (as described above), a company that leases and operates a facility located in Houston, Texas, and provides dismantling, demolition, decommission and marine salvage services at industrial facilities throughout the Gulf Coast. E-Source also owns and operates a fleet of trucks and other vehicles used for shipping and handling equipment and scrap materials. We also recently acquired Omega's Marrero, Louisiana re-refinery and Myrtle Grove complex in Belle Chasse, Louisiana and ownership of Golden State, as described above. The Marrero, Louisiana facility re-refines used motor oil and also produces vacuum gas oil. Golden State operates a strategic blending and storage facility located in Bakersfield, California. We also recently closed a lease in Churchill County, Nevada which has a used oil re-refining plant located on approximately 40 acres in Churchill County, Nevada, the Bango Plant produces base lubricating oils.

 
Black Oil Division
 
Our Black Oil division is engaged in operations across the entire used motor oil recycling value chain including collection, aggregation, transportation, storage, refinement, and sales of aggregated feedstock and re-refined products to end users. We collect and purchase used oil directly from generators such as oil change service stations, automotive repair shops, manufacturing facilities, petroleum refineries, and petrochemical manufacturing operations. We own a fleet of 18 collection vehicles, which routinely visit generators to collect and purchase used motor oil. We also aggregate used oil from a diverse network of approximately 50 suppliers who operate similar collection businesses to ours.

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

Recovery Division

10




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

We currently provide our services in 13 states, primarily in the Gulf Coast and Central Midwest regions of the United States. For the rolling twelve month period ending June 30, 2015, we aggregated approximately 132 million gallons of used motor oil and other petroleum by-product feedstocks and managed the re-refining of approximately 82 million gallons of used motor oil with our proprietary TCEP process, VGO and base oil processes.

Biomass Renewable Energy

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

Thermal Chemical Extraction Process

We own the intellectual property for our patented TCEP technology. TCEP is a technology which utilizes thermal and chemical dynamics to extract impurities from used oil which increases the value of the feedstock. We currently sell the TCEP final product as fuel oil cutterstock. We intend to continue to develop the TCEP technology and design with the goal of producing additional re-refined products including lubricating base oil.

TCEP differs from conventional re-refining technologies, such as vacuum distillation and hydrotreatment, by relying more heavily on chemical processes to remove impurities rather than temperature and pressure. Therefore, the capital requirements to build a TCEP plant are typically much less than a traditional re-refinery because large feed heaters, vacuum distillation columns, and a hydrotreating unit are not required. The end product currently produced by TCEP is used as fuel oil cutterstock. Conventional re-refineries produce lubricating base oils or product grades slightly lower than base oil that can be used as industrial fuels or transportation fuel blendstocks.

We currently estimate the cost to construct a new, fully-functional, commercial facility using our TCEP technology, with annual processing capacity of between 25 and 50 million gallons at another location would be approximately $10 to $15 million, which could fluctuate based on throughput capacity. The facility infrastructure would require additional capitalized expenditures which would depend on the location and site specifics of the facility.

Strategy and Plan of Operations

The principal elements of our strategy include:

Pursue Strategic Acquisitions and Partnerships

We plan to grow market share by consolidating feedstock supply through partnering with or acquiring collection and aggregation assets. Our executive team has a proven ability to evaluate resource potential and identify acquisition targets, funding permitting. The acquisitions and/or partnerships could increase our revenue and provide better control over the quality and quantity of feedstock available for resale and/or upgrading as well as providing additional locations for the implementation of TCEP. We also intend to diversify our revenue by acquiring complementary recycling service businesses, refining assets and technologies, and other vertically integrated businesses or assets. We believe we can realize synergies on acquisitions by leveraging our customer and vendor relationships, infrastructure, and personnel, and by eliminating duplicative overhead costs.

Expand Feedstock Supply Volume

We intend to expand our feedstock supply volume by growing our collection and aggregation operations. We plan to increase the volume of feedstock we collect directly by developing new relationships with generators and working to displace incumbent collectors; increasing the number of collection personnel, vehicles, equipment, and geographical areas we serve; and acquiring collectors in new or existing territories. We intend to increase the volume of feedstock we aggregate from third-party collectors by expanding our existing relationships and developing new vendor relationships. We believe that our ability to acquire large

11



feedstock volumes will help to cultivate new vendor relationships because collectors often prefer to work with a single, reliable customer rather than manage multiple relationships and the uncertainty of excess inventory.

Broaden Existing Customer Relationships and Secure New Large Accounts

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

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

Expand TCEP Re-Refining Capacity

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

RESULTS OF OPERATIONS

Description of Material Financial Line Items:

Revenues
 
We generate revenues from three existing operating divisions as follows:
 
BLACK OIL - Revenues for our Black Oil division are comprised primarily of product sales from our re-refineries and also feedstock sales (used motor oil) which are purchased from generators of used motor oil such as oil change shops and garages, as well as a network of local and regional suppliers. Volumes are consolidated for efficient delivery and then sold to third-party re-refiners and fuel oil blenders for the utility fuel export market. In addition, through used oil re-refining, we re-refine used oil into different commodity products. The Houston, Texas TCEP facility finished product is then sold by barge as a fuel oil cutterstock. Through the operations at our Marrero, Louisiana facility, we produce a Vacuum Gas Oil (VGO) product from used oil re-refining which is then sold via barge to crude refineries to be utilized as an intermediate feedstock in the refining process. The Marrero facility’s product is also sold as a low sulfur fuel oil blend in the marine fuel markets. Through the operations at our Columbus, Ohio facility we produce a base oil finished product which is then sold via truck or rail car to end users for blending, packaging and marketing of lubricants.

 
REFINING AND MARKETING - The Refining and Marketing division generates revenues relating to the sales of finished products.  The Refining and Marketing division gathers hydrocarbon streams in the form of petroleum distillates, transmix and other chemical products that have become off-specification during the transportation or refining process. These feedstock streams are purchased from pipeline operators, refineries, chemical processing facilities and third-party providers, and then processed at a third-party facility under our direction. The end products are typically three distillate petroleum streams (gasoline blendstock, pygas and fuel oil cutterstock), which are sold to major oil companies or to large petroleum trading and blending companies. The end products are delivered by barge and truck to customers.  


12



RECOVERY - The Recovery division is a generator solutions company for the proper recovery and management of hydrocarbon streams. This division also provides dismantling, demolition, decommission and marine salvage services at industrial facilities. We own and operate a fleet of trucks and other vehicles used for shipping and handling equipment and scrap materials.
 
Our revenues are affected by changes in various commodity prices including crude oil, natural gas, #6 oil and metals.
 
Cost of Revenues
 
BLACK OIL - Cost of revenues for our Black Oil division are comprised primarily of feedstock purchases from a network of providers. Other cost of revenues include processing costs, transportation costs, purchasing and receiving costs, analytical assessments, brokerage fees and commissions, and surveying and storage costs.
 
REFINING AND MARKETING - The Refining and Marketing division incurs cost of revenues relating to the purchase of feedstock, purchasing and receiving costs, and inspection and processing of the feedstock into gasoline blendstock, pygas and fuel oil cutter by a third party. Cost of revenues also includes broker’s fees, inspection and transportation costs.
 
RECOVERY - The Recovery division incurs cost of revenues relating to the purchase of hydrocarbon products, purchasing and receiving costs, inspection, demolition and transporting of metals and other salvage and materials. Cost of revenues also includes broker’s fees, inspection and transportation costs.
 
Our cost of revenues are affected by changes in various commodity indices, including crude oil, natural gas, #6 oil and metals. For example, if the price for crude oil increases, the cost of solvent additives used in the production of blended oil products, and fuel cost for transportation cost from third party providers will generally increase. Similarly, if the price of crude oil falls, these costs may also decline.
 
General and Administrative Expenses
 
Our general and administrative expenses consist primarily of salaries and other employee-related benefits for executive, administrative, legal, financial and information technology personnel, as well as outsourced and professional services, rent, utilities, and related expenses at our headquarters, as well as certain taxes. 

 Depreciation and Amortization Expenses

Our depreciation and amortization expenses are primarily related to the property, plant and equipment and intangible assets acquired in connection with the Holdings, E Source, Omega and Heartland acquisitions.

13



RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2015 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2014
 
Set forth below are our results of operations for the three months ended June 30, 2015 as compared to the same period in 2014.

 

Three Months Ended June 30,

 

 
 

2015

2014

$ Change

% Change
Revenues

$
49,119,711


$
72,079,622


$
(22,959,911
)

(32
)%
Cost of Revenues

43,635,177


63,844,569


(20,209,392
)

(32
)%
Gross Profit

5,484,534


8,235,053


(2,750,519
)

(33
)%
Selling, general and administrative expenses

5,641,250


4,363,617


1,277,633


29
 %
Depreciation and amortization
 
1,561,314

 
1,068,273

 
493,041

 
46
 %
Acquisition related expenses



1,959,418


(1,959,418
)

(100
)%
Income (loss) from operations

(1,718,030
)

843,745


(2,561,775
)

(304
)%
Provision for doubtful accounts
 

 

 

 
 %
Other Income (loss)

10


7


3


43
 %
Gain on change in value of derivative liability
 
1,816,982

 

 
1,816,982

 
100
 %
Bargain purchase gain related to Omega acquisition
 

 
6,481,051

 
(6,481,051
)
 
(100
)%
Other expense

12,818


(10,866
)

23,684


100
 %
Interest Expense

(556,975
)

(657,235
)

100,260


15
 %
Total other income (expense)

1,272,835


5,812,957


(4,540,122
)

(78
)%
Income (loss) before income taxes

(445,195
)

6,656,702


(7,101,897
)

(107
)%
Income tax (expense) benefit







 %
Net income (loss)

$
(445,195
)

$
6,656,702


$
(7,101,897
)

(107
)%


14



Each of our segments’ gross profit (loss) during the three months ended June 30, 2015 and 2014 was as follows: 

 

Three Months Ended 
 June 30,

 

 
Black Oil Segment

2015

2014

$ Change

% Change
Total revenue

$
34,338,534


$
48,878,522


$
(14,539,988
)

(30
)%
Total cost of revenue

30,912,204


42,973,852


(12,061,648
)

(28
)%
Gross profit (loss)

3,426,330


5,904,670


(2,478,340
)

(42
)%
Selling general and administrative expense
 
5,938,154

 
4,787,982

 
1,150,172

 
24
 %
Income (loss) from operations
 
$
(2,511,824
)
 
$
1,116,688

 
$
(3,628,512
)
 
(325
)%
 
 
 
 
 
 
 
 
 
Refining Segment

 


 


 


 

Total revenue

$
11,447,889

 
$
18,517,819


$
(7,069,930
)
 
(38
)%
Total cost of revenue

9,956,771

 
16,626,592


(6,669,821
)
 
(40
)%
Gross profit

1,491,118


1,891,227


(400,109
)
 
(21
)%
Selling general and administrative expense
 
787,734

 
1,123,018

 
(335,284
)
 
(30
)%
Income from operations
 
$
703,384

 
$
768,209

 
$
(64,825
)
 
(8
)%
 
 
 
 
 
 
 
 
 
Recovery Segment












Total revenue

$
3,333,288

 
$
4,683,281


$
(1,349,993
)
 
(29
)%
Total cost of revenue

2,766,202

 
4,244,125


(1,477,923
)
 
(35
)%
Gross profit

567,086


439,156


127,930

 
29
 %
Selling general and administrative expense
 
476,676

 
1,480,308

 
(1,003,632
)
 
(68
)%
Income (loss) from operations
 
$
90,410

 
$
(1,041,152
)
 
$
1,131,562

 
109
 %
 

The following schedule separates revenues and gross profit contributed by our recently acquired business entities and operations, Omega Refining, E-Source and Heartland, during the three month period ending June 30, 2015. The isolated figures are presented in dollars and as a percentage of total consolidated revenue.
 
Three Months Ended June 30, 2015
 
 
Consolidated Results
Omega Refining
% Contributed by Omega Refining
Total Revenue
$
49,119,711

$
16,743,462

34%
Gross Profit
5,484,534

341,979

6%
 
 
 
 
 
Consolidated Results
E-Source
% Contributed by E-Source
Total Revenue
$
49,119,711

$
1,077,162

2%
Gross Profit
5,484,534

328,730

6%
 
 
 
 
 
Consolidated Results
Heartland
% Contributed by Heartland
Total Revenue
$
49,119,711

$
6,336,149

13%
Gross Profit
5,484,534

1,305,045

24%
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 decreased by 32% for the three months ended June 30, 2015 compared to the same period in 2014, due primarily to lower commodity prices during the three months ended June 30, 2015 compared to the same period in 2014. Total volume increased 19% largely as a result of the additions of the Marrero, Louisiana facility in May 2014, which produces a VGO finished

15



product as well as the Heartland facility in Columbus, Ohio in December 2014, which produces a base oil finished product. Gross profit decreased by 33% for the three months ended June 30, 2015 compared to the three months ended June 30, 2014. Prices of our finished products continue to be impacted across the industry by the lower commodity prices. Additionally, our per barrel margin decreased 44% relative to the three months ended June 30, 2014. This decrease was a result of increased operational costs related to the Marrero and Heartland facilities in addition to decreased margins in our feedstock and finished product values during the three months ended June 30, 2015, compared to the same period during 2014. In addition volumes were lower than our targets at our Marrero facility related to working capital challenges and constraints during much of the period. The working capital challenges during the period impacted our ability to purchase spot barges of product which help supplement the daily delivery of railcars we receive. The 32% decrease in cost of revenues for the three months ended June 30, 2015 compared to the three months ended June 30, 2014 is mainly a result of the overall decrease in commodity prices which has an impact on the prices we pay for feedstock.

Our Black Oil division's volume increased approximately 10% during the three months ended June 30, 2015 compared to the same period in 2014. This increase was due to the increased amount of volume managed through our Marrero and Heartland facilities which produces a VGO finished product and base oil respectively. Volumes collected through our H&H Oil and Heartland collection facilities increased 53% during the three months ended June 30, 2015 compared to the same period in 2014. Our focus continues to be on growing our own volumes of collected oil and displacing third party oil processed in our facilities.

Overall volumes of product sold increased 19% for the second quarter of 2015 versus the second quarter of 2014. This is important for our business as it illustrates our reach into the market and expansion of overall market share.

We experienced a 28% decrease in the volume of our TCEP refined product during the three months ended June 30, 2015, compared to the same period in 2014. This decrease was a result of strategic decisions that were made during the first quarter not to produce our TCEP finished product and to ship the feedstock we would have otherwise used at our TCEP facility to our Marrero facility due to market pricing impacts on the margins of the product produced in the Houston market vs. the Marrero, Louisiana market. During the second quarter of 2015 we slowly brought production back on-line at our TCEP operation; however we continue to send some of the product we previously processed at the TCEP facility to our Marrero facility. In order to keep the volumes up and move lower priced feedstock through the Marrero facility. In addition, commodity prices decreased approximately 45% for the three months ended June 30, 2015, compared to the same period in 2014. The average posting (U.S. Gulfcoast Residual Fuel No. 6 3%) for the three months ended June 30, 2015 decreased $40.94 per barrel from a three month average of $91.86 for the three months ended June 30, 2014 to $50.91 per barrel for the three months ended June 30, 2015.

Our TCEP technology generated revenues of $9,328,599 during the three months ended June 30, 2015 with cost of revenues of $7,891,407, producing a gross profit of $1,437,152.  The per barrel margin for our TCEP product decreased 53% as compared to the same period during 2014. This decrease was largely a result of the decrease in TCEP volume during the quarter as described above, which resulted in the continued carrying cost for the operation with very low throughput, as well as a lower priced commodity market which has put additional pressure on our margins, due to the way we calculate purchases on a percentage discount basis at this facility. Volumes of produced product using TCEP tend to vary significantly from quarter-to-quarter based on opportunistic purchases of products and production availability and timing at the facility we operate.

Overall volume for the Refining and Marketing division increased 15% during the three months ended June 30, 2015 as compared to the same period in 2014. This division experienced an increase in production of 38% for its gasoline blendstock for the three months ended June 30, 2015, compared to the same period in 2014. Our fuel oil cutter volumes decreased 35% for the three months ended June 30, 2015, compared to the same period in 2014. Our pygas volumes increased 61% for the three months ended June 30, 2015 as compared to the same period in 2014.

Our Recovery division includes the business operations of Vertex Recovery as well as the recently acquired business of E-Source (of which we own a 100% interest). Revenues for this division decreased 29% mostly as a result of decreased commodity prices as well as project work during the period at our E-Source division for the three months ended June 30, 2015, compared to the prior period. Gross profit for the recovery division increased 29% for the three months ended June 30, 2015, compared to the same period in 2014. Our volumes increased 225% for the three months ended June 30, 2015 as compared to the same period in 2014. This division through E-Source periodically participates in project work that is not ongoing thus we expect to see fluctuations in revenue and gross profit from this division from period to period.

Overall gross profit decreased 33% and our margin per barrel decreased approximately 44% for the three months ended June 30, 2015, compared to the same period in 2014. This decrease was largely a result of lower commodity prices across the industry along with the decrease in overall business production at each of our facilities compared to what we planned for.

16




The following table sets forth the high and low spot prices during the first three and six months of 2015 for our key benchmarks.

2015
 
 
 
 
 
 
 
 
Benchmark
 
High
 
Date
 
Low
 
Date
U.S. Gulfcoast No. 2 Waterborne (dollars per gallon)
 
$
1.91

 
May 6
 
$
1.59

 
April 8
U.S. Gulfcoast Unleaded 87 Waterborne (dollars per gallon)
 
$
2.16

 
June 11
 
$
1.72

 
April 8
U.S. Gulfcoast Residual Fuel No. 6 3% (dollars per barrel)
 
$
54.73

 
May 6
 
$
43.19

 
April 2
NYMEX Crude oil (Dollars per barrel)
 
$
61.43

 
June 10
 
$
49.14

 
April 2
Reported in Platt's US Marketscan (Gulf Coast)
 
 
 
 

 
 

The following table sets forth the high and low spot prices during the first three and six months of 2014 for our key benchmarks.

2014
 
 
 
 
 
 
 
 
Benchmark
 
High
 
Date
 
Low
 
Date
U.S. Gulfcoast No. 2 Waterborne (dollars per gallon)
 
$
3.00

 
March 3
 
$
2.73

 
February 4
U.S. Gulfcoast Unleaded 87 Waterborne (dollars per gallon)
 
$
3.08

 
June 20
 
$
2.54

 
January 3
U.S. Gulfcoast Residual Fuel No. 6 3% (dollars per barrel)
 
$
94.94

 
June 24
 
$
87.09

 
January 13
NYMEX Crude oil (Dollars per barrel)
 
$
107.26

 
June 20
 
$
91.66

 
January 9
Reported in Platt's US Marketscan (Gulf Coast)
 
 
 
 

 
 

We saw a significant decrease during the first six months of 2015 in each of the benchmark commodities we track compared to the same period in 2014.

Our margins are a function of the difference between what we are able to pay for raw materials and the market prices for the range of products produced. The various petroleum products produced are typically a function of crude oil indices and are quoted on multiple exchanges such as the New York Mercantile Exchange ("NYMEX"). These prices are determined by a global market and can be influenced by many factors, including but not limited to supply/demand, weather, politics, and global/regional inventory levels. As such, we cannot provide any assurances regarding results of operations for any future periods, as numerous factors outside of our control affect the prices paid for raw materials and the prices (for the most part keyed to the NYMEX) that can be charged for such products. Additionally, for the near term, results of operations will be subject to further uncertainty, as the global markets and exchanges, including the NYMEX, continue to experience volatility.

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, we anticipate that 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 we are not able to continue to refine and improve our technologies and gain efficiencies in the TCEP technology, our VGO technology through our Marrero facility, and our base oil technology at Heartland 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 (as described above, our revenues track the spread between the prices we purchase feedstock for and the prices we can sell finished product at), 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.

We had total operating expenses of $7,202,564 for the three months ended June 30, 2015, which included $0 of acquisition related expenses, compared to $7,391,308 of total operating for the prior year’s period (including $1,959,418 of acquisition related expenses), a decrease of $188,744 or 3% from the prior period. This decrease is primarily due to the reduction of acquisition

17



related costs, offset by an increase of $493,041 in depreciation and amortization and an increase of $1,277,633 in selling, general and administrative expense.

We had a loss from operations of $1,718,030 for the three months ended June 30, 2015, compared to income from operations of $843,745 for the three months ended June 30, 2014, a decrease of $2,561,775 or 304% from the prior year’s period. The decrease was mainly due to market and operational conditions as well as the additional selling general and administrative expenses associated with new product lines, and acquired operations. We have implemented an inventory management and hedging solution that we believe will mitigate some of the exposure the Company has historically had to sharp declines in oil and commodity prices moving forward.

We had a provision for doubtful accounts of $2,650,000 for the three months ended June 30, 2015, compared to no provision for doubtful accounts for the three months ended June 30, 2014. The provision for doubtful accounts was related to amounts owed to Omega under the Omega Secured Note including $1,696,452 which was unsecured, and which the collection of which is doubtful, and $2,650,000 which is collateralized by insurance proceeds expected to be collected in 2015, due to revised insurance proceed expectations.

We also had interest expense of $556,975 for the three months ended June 30, 2015, compared to interest expense of $657,235 for the three months ended June 30, 2014, an increase in interest expense of $100,260 or 15% from the prior period mainly due to the debt facilities with Goldman Sachs and Midcap as described below.

We had $1,816,982 of gain on change in value of derivative liability for the three months ended June 30,2015, in connection with a beneficial conversion feature on certain warrants granted in June 2015, as described in greater detail in Note 11 to the unaudited financial statements included herein under "Part 1"-"Item 1. Financial Statements".

Contributing to other income for the six months ended June 30, 2014 was $6,481,051, relating to a one-time non-cash bargain purchase benefit from the purchase price of the Omega assets.

We had net loss of $445,195 for the three months ended June 30, 2015, compared to net income of $6,656,702 for the three months ended June 30, 2014, a decrease in net income of $7,101,897 or 107% from the prior period for the reasons described above.

During the three months ended June 30, 2015, the processing costs for our Refining and Marketing division located at KMTEX were $1,279,124. In addition, we have provided the results of operations for this segment of our business below during the same three month period.
Three Months Ended June 30, 2015
 
Refining and Marketing
Revenues
$
11,447,889

 
 
Income (loss) from operations
$
703,384













18



RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2015 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2014

Set forth below are our results of operations for the six months ended June 30, 2015 as compared to the same period in 2014.
 
 
Six Months Ended June 30,
 
 
 
 
 
 
2015
 
2014
 
$ Change
 
% Change
Revenues
 
$
86,804,050

 
$
119,429,280

 
$
(32,625,230
)
 
(27
)%
Cost of Revenues
 
81,643,633

 
106,188,202

 
(24,544,569
)
 
(23
)%
Gross Profit
 
5,160,417

 
13,241,078

 
(8,080,661
)
 
(61
)%
Selling, general and administrative expenses
 
11,011,278

 
7,079,966

 
3,931,312

 
56
 %
Depreciation and amortization
 
3,118,296

 
1,800,950

 
1,317,346

 
73
 %
Acquisition related expenses
 
157,678

 
2,559,830

 
(2,402,152
)
 
(94
)%
Income (loss) from operations
 
(9,126,835
)
 
1,800,332

 
(10,927,167
)
 
(607
)%
Provision for doubtful accounts
 
(2,650,000
)
 

 
(2,650,000
)
 
(100
)%
Other Income (loss)
 
18

 
377

 
(359
)
 
(95
)%
Bargain purchase gain related to Omega acquisition
 

 
6,481,051

 
(6,481,051
)
 
(100
)%
Other expense
 
(57,660
)
 
(10,866
)
 
(46,794
)
 
431
 %
Gain on change in value of derivative liability
 
1,816,982

 

 
1,816,982

 
100
 %
Interest Expense
 
(2,088,155
)
 
(733,046
)
 
(1,355,109
)
 
185
 %
Total other income (expense)
 
(2,978,815
)
 
5,737,516

 
(8,716,331
)
 
(152
)%
Income (loss) before income taxes
 
(12,105,650
)
 
7,537,848

 
(19,643,498
)
 
(261
)%
Income tax (expense) benefit
 
(5,306,000
)
 

 
(5,306,000
)
 
(100
)%
Net income (loss)
 
$
(17,411,650
)
 
$
7,537,848

 
$
(24,949,498
)
 
(331
)%


19



Each of our segments’ gross profit (loss) during the six months ended June 30, 2015 and 2014 was as follows: 

 
 
Six Months Ended June 30,
 
 
 
 
Black Oil Segment
 
2015
 
2014
 
$ Change
 
% Change
Total revenue
 
$
59,252,510

 
$
72,449,922

 
$
(13,197,412
)
 
(18
)%
Total cost of revenue
 
58,053,328

 
64,200,948

 
(6,147,620
)
 
(10
)%
Gross profit (loss)
 
1,199,182

 
8,248,974

 
(7,049,792
)
 
(85
)%
Selling general and administrative expense
 
11,686,498

 
7,111,896

 
4,574,602

 
64
 %
Income (loss) from operations
 
$
(10,487,316
)
 
$
1,137,078

 
$
(11,624,394
)
 
(1,022
)%
 
 
 
 
 
 
 
 
 
Refining Segment
 
 

 
 

 
 

 
 

Total revenue
 
$
19,714,009

 
$
38,345,278

 
$
(18,631,269
)
 
(49
)%
Total cost of revenue
 
17,262,173

 
34,878,483

 
(17,616,310
)
 
(51
)%
Gross profit
 
2,451,836

 
3,466,795

 
(1,014,959
)
 
(29
)%
Selling general and administrative expense
 
1,611,587

 
1,928,011

 
(316,424
)
 
(16
)%
Income from operations
 
$
840,249

 
$
1,538,784

 
$
(698,535
)
 
(45
)%
 
 
 
 
 
 
 
 
 
Recovery Segment
 
 
 
 
 
 
 
 
Total revenue
 
$
7,837,531

 
$
8,634,080

 
$
(796,549
)
 
(9
)%
Total cost of revenue
 
6,328,132

 
7,108,771

 
(780,639
)
 
(11
)%
Gross profit
 
1,509,399

 
1,525,309

 
(15,910
)
 
(1
)%
Selling general and administrative expense
 
989,167

 
2,400,839

 
(1,411,672
)
 
(59
)%
Income (loss) from operations
 
$
520,232

 
$
(875,530
)
 
$
1,395,762

 
159
 %
 

The following schedule separates revenues and gross profit contributed by our recently acquired business entities and operations, Omega Refining, E-Source and Heartland, during the six month period ending June 30, 2015. The isolated figures are presented in dollars and as a percentage of total consolidated revenue.
 
Six Months Ended June 30, 2015
 
 
Consolidated Results
Omega Refining
% Contributed by Omega Refining
Total Revenue
$
86,804,050

$
31,800,294

37%
Gross Profit (loss)
5,160,417

(1,655,165
)
(32)%
 
 
 
 
 
Consolidated Results
E-Source
% Contributed by E-Source
Total Revenue
$
86,804,050

$
2,655,333

3%
Gross Profit
5,160,417

821,673

9%
 
 
 
 
 
Consolidated Results
Heartland
% Contributed by Heartland
Total Revenue
$
86,804,050

$
11,371,289

13%
Gross Profit
5,160,417

1,288,296

25%
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 decreased by 27% for the six months ended June 30, 2015 compared to the same period in 2014, due primarily to the lower commodity prices during the six months ended June 30, 2015 compared to the same period in 2014. Total volume increased 24% largely as a result of the recent addition of the Marrero, Louisiana facility in May 2014, which produces a VGO

20



finished product as well as the Heartland facility in Columbus, Ohio in December 2014, which produces a base oil finished product. Gross profit decreased by 61% for the six months ended June 30, 2015 compared to the six months ended June 30, 2014. Prices of our finished products were impacted across the industry by the sharp decline in energy prices that occurred during the last quarter of 2014 and the first three months of 2015. Additionally, our per barrel margin decreased 69% relative to the six months ended June 30, 2014. This decrease was a result of increased operational costs related to the Marrero and Heartland facilities in addition to decreased margins in our feedstock and finished product values during the six months ended June 30, 2015, compared to the same period during 2014. In addition volumes were lower than our targets at our Marrero and Heartland facility related to working capital challenges during the period, which were exacerbated by colder temperatures and inclement weather in the Ohio region that added to these challenges. The excessive cold temperatures experienced during the first quarter of the year extended the time our facilities were down during one of our turn-arounds. The working capital challenges during the period impacted our ability to purchase spot barges of finished product which help supplement the rail deliveries we receive on a daily basis. The 23% decrease in cost of revenues for the six months ended June 30, 2015 compared to the six months ended June 30, 2014 is mainly a result of the overall decrease in commodity prices which has an impact on the prices we pay for feedstock.

Our Black Oil division's volume increased approximately 31% during the six months ended June 30, 2015 compared to the same period in 2014. This increase was due to the increased amount of volume managed through our Marrero and Heartland facilities which produce a VGO finished product and base oil respectively. Volumes collected through our H&H Oil and Heartland collection facilities increased 59% during the six months ended June 30, 2015 compared to the same period in 2014. One of our key initiatives continues to be a focus on growing our own volumes of collected material and displacing the third party oil processed in our facilities.

Overall volumes of product sold increased 24% for the six months ended June 30, 2015 versus the same period in 2014. This is important for our business as it illustrates our reach into the market and expansion of overall market share.

We experienced a 51% decrease in the volume of our TCEP refined product during the six months ended June 30, 2015, compared to the same period in 2014. This decrease was a result of strategic decisions we made not to produce our TCEP finished product during January and February 2015 and to ship the feedstock we would have otherwise used at our TCEP facility to our Marrero facility due to market pricing impacts on the margins of the product produced in the Houston market vs. the Marrero, Louisiana market. The margins on the VGO product produced at our Marrero facility tend to be greater than those produced at our TCEP facility, and due to the sharp decline in prices we were not able to adjust our feedstock purchases at our TCEP facility to keep up with the change in market conditions. In addition, commodity prices decreased approximately 47% for the six months ended June 30, 2015, compared to the same period in 2014. The average posting (U.S. Gulfcoast Residual Fuel No. 6 3%) for the six months ended June 30, 2015 decreased $42.96 per barrel from a six month average of $90.57 for the six months ended June 30, 2014 to $47.61 per barrel for the six months ended June 30, 2015.

Our TCEP technology generated revenues of $11,585,930 during the six months ended June 30, 2015 with cost of revenues of $10,471,299, producing a gross profit of $1,114,631. The per barrel margin for our TCEP product decreased 65% as compared to the same period during 2014. This decrease was largely a result of the decrease in TCEP volume during the quarter as described above, which resulted in the continued carrying cost for the operation with very low throughput.

Overall volume for the Refining and Marketing division decreased 5% during the six months ended June 30, 2015 as compared to the same period in 2014. This division experienced a decrease in production of 10% for its gasoline blendstock for the six months ended June 30, 2015, compared to the same period in 2014. Our fuel oil cutter volumes decreased 33% for the six months ended June 30, 2015, compared to the same period in 2014. Our pygas volumes increased 58% for the six months ended June 30, 2015 as compared to the same period in 2014. These decreases were a result of decisions not to purchase or process certain non-profitable feedstock streams under the current market conditions.

Our Recovery division includes the business operations of Vertex Recovery as well as the recently acquired business of E-Source (of which we own a 100% interest). Revenues for this division decreased 9% mostly as a result of lower commodity prices and the decline of project based work related to our E-Source business during the six months ended June 30, 2015, compared to the same period in 2014. We did experience increased volumes of petroleum products acquired during the six months ended June 30, 2015 in our Recovery business. This division through E-Source periodically participates in project work that is not ongoing thus we expect to see fluctuations in revenue and gross profit from this division from period to period.

Overall gross profit decreased 61% and our margin per barrel decreased approximately 69% for the six months ended June 30, 2015, compared to the same period in 2014. This decrease was largely a result of lower volumes than expected at each facility along with the decrease in overall business production at each of our facilities compared to what we planed for.


21



We had selling, general, and administrative expenses of $14,129,574 for the six months ended June 30, 2015, which does not include $157,678 of acquisition related expenses, compared to $8,880,916 of total operating expenses for the prior year’s period (which does not include $2,559,830 of acquisition related expenses), an increase of $5,248,658 or 59% from the prior period (not including acquisition related expenses). This increase is primarily due to the additional selling, general and administrative expenses generated by new business lines, specifically those business lines acquired from Omega Refining, Heartland and the E-Source acquisition, as well as increased sales expenses associated with our expansion into new West Coast markets.

We had a loss from operations of $9,126,835 for the six months ended June 30, 2015, compared to income from operations of $1,800,332 for the six months ended June 30, 2014, a decrease of $10,927,167 or 607% from the prior year’s period. The decrease was mainly due to market and operational conditions which resulted in a decrease in revenue as described above as well as the additional selling general and administrative expenses associated with new product lines, and acquired operations.

We had a provision for doubtful accounts of $2,650,000 for the six months ended June 30, 2015, compared to no provision for doubtful accounts for the six months ended June 30, 2014. The provision for doubtful accounts was related to amounts owed to Omega under the Omega Secured Note including $1,696,452 which was unsecured, and which the collection of which is doubtful, and $2,650,000 which is collateralized by insurance proceeds expected to be collected in 2015, due to revised insurance proceed expectations.

We also had interest expense of $2,088,155 for the six months ended June 30, 2015, compared to interest expense of $733,046 for the six months ended June 30, 2014, an increase in interest expense of $1,355,109 or 185% from the prior period mainly due to the debt facilities with Goldman Sachs and Midcap as described below. We had total other expense of $57,660 for the six months ended June 30, 2015, related to the disposal of assets compared to total other expense of $10,866 for the six months ended June 30, 2014, also due to the disposal of assets.

We had $1,816,982 of gain on change in value of derivative liability for the six months ended June 30, 2015, in connection with a beneficial conversion feature on certain warrants granted in June 2015, as described in greater detail in Note 11 to the unaudited financial statements included herein under "Part 1"-"Item 1 Financial Statements".

Contributing to other income for the sixth months ended June 30, 2015 was $6,481,051, relating to a one-time non-cash bargain purchase benefit from the purchase price of the Omega assets.

We had an income tax expense of $5,306,000 for the six months ended June 30, 2015, compared to no income tax expense for the six months ended June 30, 2014. For tax reporting purposes, we have net operating losses (“NOLs”) of approximately $48.1 million as of June 30, 2015 that are available to reduce future taxable income. In determining the carrying value of our net deferred tax asset, the Company considered all negative and positive evidence. The Company has incurred a cumulative pre-tax loss of $14.7 million over a three year period ended June 30, 2015. As a result, we determined that a full valuation allowance for our deferred tax assets at June 30, 2015 of $5,306,000 was appropriate.

We had net loss of $17,411,650 for the six months ended June 30, 2015, compared to net income of $7,537,848 for the six months ended June 30, 2014, a decrease in net income of $24,949,498 or 331% from the prior period for the reasons described above.

During the six months ended June 30, 2015, the processing costs for our Refining and Marketing division located at KMTEX were $2,294,159. In addition, we have provided the results of operations for this segment of our business below during the same three month period.
Six Months Ended June 30, 2015
 
Refining and Marketing
Revenues
$
19,714,009

 
 
Income (loss) from operations
$
840,249






22



Set forth below, we have disclosed a quarter-by-quarter summary of our statements of operations and statements of operations by segment information for the first two quarters of fiscal 2015 and for fiscal year 2014, by quarter.
 
 
Fiscal 2015
 
Fiscal 2014
 
 
 
Second
 
First
 
Fourth
 
Third
 
Second
 
First
 
 
 
Quarter
 
Quarter
 
Quarter
 
Quarter
 
Quarter
 
Quarter
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
49,119,711

 
$
37,684,339

 
$
62,572,071

 
$
76,903,516

 
$
72,079,622

 
$
47,349,658

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of Revenues
 
43,635,177

 
38,008,456

 
67,049,736

 
73,761,171

 
63,844,569

 
42,343,633

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross Profit (loss)
 
5,484,534

 
(324,117
)
 
(4,477,665
)
 
3,142,345

 
8,235,053

 
5,006,025

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reduction of contingent liability
 

 

 
(3,371,836
)
 
(1,876,752
)
 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative expenses
 
5,641,250

 
5,370,028

 
7,783,149

 
4,706,104

 
4,363,617

 
2,716,349

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
 
1,561,314

 
1,556,982

 
1,296,450

 
1,180,443

 
1,068,273

 
732,677

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquisition related expenses
 

 
157,678

 
994,603

 
259,235

 
1,959,418

 
600,412

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total selling, general and administrative expenses
 
7,202,564

 
7,084,688

 
6,702,366

 
4,269,030

 
7,391,308

 
4,049,438

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from operations
 
(1,718,030
)
 
(7,408,805
)
 
(11,180,031
)
 
(1,126,685
)
 
843,745

 
956,587

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other income (expense)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Provision for doubtful accounts
 

 
(2,650,000
)
 

 

 

 

 
   Other income
 
10

 
8

 
223,255

 
109,980

 
7

 
370

 
Gain on bargain purchase
 

 

 
375,000

 
92,635

 
6,481,051

 

 
   Other expense
 
12,818

 
(70,478
)
 

 

 
(10,866
)
 

 
   Gain on change in value of derivative liability
 
1,816,982

 

 

 

 

 

 
   Interest expense
 
(556,975
)
 
(1,531,180
)
 
(956,319
)
 
(947,325
)
 
(657,235
)
 
(75,811
)
 
Total other income (expense)
 
1,272,835

 
(4,251,650
)
 
(358,064
)
 
(744,710
)
 
5,812,957

 
(75,441
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) before income taxes
 
(445,195
)
 
(11,660,455
)
 
(11,538,095
)
 
(1,871,395
)
 
6,656,702

 
881,146

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income tax benefit (expense)
 

 
(5,306,000
)
 
57,975

 
(57,975
)
 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
$
(445,195
)
 
$
(16,966,455
)
 
$
(11,480,120
)
 
$
(1,929,370
)
 
$
6,656,702

 
$
881,146

 
Net income (loss) attributable to non-controlling interest
 

 

 

 

 
344,380

 
(18,981
)
 
Net income (loss) attributable to Vertex Energy, Inc.
 
$
(445,195
)
 
$
(16,966,455
)
 
$
(11,480,120
)
 
$
(1,929,370
)
 
$
7,001,082

 
$
862,165

 
The below graph charts our total quarterly revenue over time from January 1, 2013 to June 30, 2015:


23




 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fiscal 2015
 
Fiscal 2014
 
 
 
Second
 
First
 
Fourth
 
Third
 
Second
 
First
 
 
 
Quarter
 
Quarter
 
Quarter
 
Quarter
 
Quarter
 
Quarter
 
Black Oil
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
34,338,534

 
$
24,913,976

 
$
46,028,775

 
$
52,434,252

 
$
48,878,522

 
$
23,571,400

 
Cost of revenues
 
30,912,204

 
27,141,124

 
48,709,354

 
50,846,953

 
42,973,852

 
21,227,096

 
Gross profit
 
$
3,426,330

 
$
(1,824,562
)
 
$
(2,680,579
)
 
$
1,587,299

 
$
5,904,670

 
$
2,344,304

 
Refining & Marketing
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
11,447,889

 
$
8,266,120

 
$
14,694,971

 
$
19,655,674

 
$
18,517,819

 
$
19,827,459

 
Cost of revenues
 
9,956,771

 
7,305,402

 
15,570,210

 
18,680,731

 
16,626,592

 
18,251,891

 
Gross profit (loss)
 
$
1,491,118

 
$
906,718

 
$
(875,239
)
 
$
974,943

 
$
1,891,227

 
$
1,575,568

 
Recovery
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
3,333,288

 
$
4,504,243

 
$
1,848,325

 
$
4,813,590

 
$
4,683,281

 
$
3,950,799

 
Cost of revenues
 
2,766,202

 
3,561,930

 
2,770,172

 
4,233,487

 
4,244,125

 
2,864,646

 
Gross profit (loss)
 
$
567,086

 
$
942,313

 
$
(921,847
)
 
$
580,103

 
$
439,156

 
$
1,086,153

 

Liquidity and Capital Resources
 
The success of our current business operations has become dependent on repairs, and maintenance to our facilities and our ability to make routine capital expenditures. We also must maintain relationships with feedstock suppliers and end-product customers, and operate with efficient management of overhead costs. Through these relationships, we have historically been able to achieve volume discounts in the procurement of our feedstock, thereby increasing the margins of our segments’ operations. The resulting operating cash flow is crucial to the viability and growth of our existing business lines.

We had total assets of $120,230,689 as of June 30, 2015 compared to $133,822,231 at December 31, 2014. The decrease was mainly due to a decrease of $3,532,326 in inventory, a decrease of $299,533 in cash and cash equivalents, a $5,306,000 net decrease in deferred federal income tax, a $779,285 decrease in costs in excess of billings, an increase of $1,981,429 in depreciation, as well as a $872,010 reduction in intangible assets, a $249,008 reduction in financing costs, and a $2,150,0000 decrease in current portion of notes receivable offset by a $3,096,566 increase in accounts receivable, net. Total current assets as of June 30, 2015 of $31,642,656 consisted of cash and cash equivalents of $5,717,543, accounts receivable, net, of $13,033,513, notes receivable of

24



$1,000,000, relating to the Omega Secured Note described below, inventory of $9,088,290, and prepaid expenses of $2,803,310. Non-current assets consisted of fixed assets, net, of $55,292,400, these consist of property, plant and equipment related to our various processing facilities, note receivable - related party of $8,308,000, relating to the Omega Secured Note described below, net intangible assets of $17,640,950, which primarily represents the value of the Company's TCEP patent and certain other patents acquired from Omega Refining, and $4,922,353 of goodwill (booked in connection with the acquisition of Holdings and E-Source), deferred financing costs of $1,942,880, and other assets of $481,450. Our cash, accounts receivable, inventory and accounts payable fluctuate and are somewhat tied to one another based on the timing of our inventory cycle and sales.

We had total current liabilities of $28,280,478 as of June 30, 2015 compared to $63,076,685 at December 31, 2014. This decrease was largely due to a reduction and reclassification in the current portion of long-term debt in the amount of $35,748,753, due to a paydown requirement during the first half of the year the entire amount of our debt with Goldman Sachs (as described below) was accounted for as current debt as of December 31, 2014. We made a payment in the amount of $15,100,000 towards this outstanding debt during the second quarter of 2015 which reduced the amount owed and resulted in a significant portion of the prior current debt being moved to long-term debt. This was offset set by a $1,815,795 increase in revolving note in connection with amounts borrowed from MidCap as described below. As of June 30, 2015, accounts payable totaled $21,143,784 and we had capital lease liabilities of which the current portion outstanding at June 30, 2015 was $408,145. In addition, we had $4,387,831 of current liabilities associated with long-term debt of which $289,607 is related to E-Source and $4,098,224 is related to the Goldman Sachs credit facility (as described above) and our prior credit facility with Bank of America (BOA). Also as described below we had $1,815,795 owed to MidCap.

We had total liabilities of $62,116,456 as of June 30, 2015, including current liabilities of $28,280,478 and long-term liabilities of $22,555,893 of long-term debt, which included $1,755,893 related to E-Source debt, $5,211,085 of derivative liability, described in greater detail in Note 11 to the unaudited financial statements included herein under "Part 1"-"Item 1 Financial Statements", and $6,069,000 of contingent consideration relating to the remaining potential earn-out payments associated with the acquisition of Heartland in December 2014.

We had positive working capital of $3,362,178 as of June 30, 2015, compared to negative working capital of $29,327,453 as of December 31, 2014. The increase in working capital from December 31, 2014 to June 30, 2015 is due to an increase in accounts receivable as of June 30, 2015, a decrease in accounts payable, the reclassification of certain current debt to long-term debt as described above, off-set by the increase in the balance of the revolving note.
 
Our future operating cash flows will vary based on a number of factors, many of which are beyond our control, including commodity prices, the cost of recovered oil, and the ability to turn our inventory. Other factors that have affected and are expected to continue to affect earnings and cash flow are transportation, processing, and storage costs. Over the long term, our operating cash flows will also be impacted by our ability to effectively manage our administrative and operating costs. Additionally, we may incur future capital expenditures related to new TCEP facilities.

On May 2, 2014, in connection with the closing of the Omega Refining acquisition, the Company assumed two capital leases totaling $3,154,860. Payments of $2,592,144 were made and the balance was $408,145 at June 30, 2015.

The Company has notes payable to various financial institutions, bearing interest at rates ranging from 5.5% to 6.35%, maturing January 7, 2020. The balance of the notes payable is $2,045,500 at June 30, 2015.

The Company financed insurance premiums through various financial institutions bearing interest rates from 4% to 4.52%. All such premium finance agreements have maturities of less than one year and have a balance of $898,224 at June 30, 2015.














25



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

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

 
$
1,815,795

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

 
24,000,000

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

 
408,145

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

 
2,045,500

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

 
898,224

 
 
 
 
 
 
 
 
$
51,511,072

 
$
29,167,664


Future contractual maturities of notes payable are summarized as follows:

Creditor
 
2015
 
2016
 
2017
 
2018
 
2019
 
Thereafter
MidCap Business Credit, LLC
 
$
1,815,795

 
$

 
$

 
$

 
$

 
$

Goldman Sachs USA
 
1,600,000

 
3,200,000

 
3,200,000

 
3,200,000

 
12,800,000

 

Pacific Western Bank
 
88,044

 
186,947

 
133,154

 

 

 

Texas Citizens Bank
 
71,394

 
442,600

 
468,225

 
495,013

 
523,333

 
44,935

Various institutions
 
898,224

 

 

 

 

 

Totals
 
$
4,473,457

 
$
3,829,547

 
$
3,801,379

 
$
3,695,013

 
$
13,323,333

 
$
44,935



The Company has various leases for office facilities and vehicles which are classified as operating leases, and which expire at various times through 2032. Total rent expense for the six months ended June 30, 2015 and 2014 is summarized as follows:

 
 
Six Months Ended June 30,
 
 
2015
 
2014
Office leases
 
$
344,734

 
$
142,402

Plant Leases
 
2,356,800

 

Vehicle leases
 
200,138

 
106,257

 
 
$
2,901,672

 
$
248,659



Minimum future lease commitments as of June 30, 2015 are summarized as follows:  

 
 
Office Facilities
 
Vehicles
Plant Leases
 
Totals
2015
 
$
270,110

 
$
212,513

$
1,998,000

 
$
2,480,623

2016
 
453,154

 
454,301

6,924,000

 
7,831,455

2017
 
414,932

 
175,216

6,574,000

 
7,164,148

2018
 
312,466

 
57,710

4,060,000

 
4,430,176

2019
 
300,000

 

2,928,000

 
3,228,000

thereafter
 
4,175,000

 

14,640,000

 
18,815,000

 
 
$
5,925,662

 
$
899,740

$
37,124,000

 
$
43,949,402



26



In addition to the above, we are required to redeem any non-converted shares of Series B Preferred Stock, which remain outstanding on December 24, 2020, at the rate of $3.10 per share (or $25 million in aggregate as of the date of this filing subject to the terms of our senior loan documents, which funds we may not have, or which may not be available on favorable terms, if at all.

Credit and Guaranty Agreement

Effective May 2, 2014, we and our then newly formed subsidiary, Vertex Operating, as well as certain of our other direct and indirect subsidiaries as guarantors, entered into a Credit and Guaranty Agreement with Goldman Sachs Specialty Lending Holdings, Inc. (“Lender”) and Goldman Sachs Bank USA, as Administrative Agent and Collateral Agent for Lender (“Agent”) , which was subsequently amended by a First Amendment to Credit and Guaranty Agreement (the “First Amendment”) dated December 5, 2014, a Second Amendment to Credit and Guaranty Agreement dated March 26, 2015 (the “Second Amendment”, as described in greater detail in the Current Report on Form 8-K filed by the Company on March 31, 2015) and a Third Amendment to Credit and Guaranty Agreement dated June 18, 2015 (as described in greater detail in the Form 8-K filed by the Company on June 19, 2015 (the “Third Amendment” and the Credit and Guaranty Agreement as amended to date, the “Credit Agreement”). The discussion of the Credit Agreement below takes into account the amendments affected by the First Amendment, Second Amendment and Third Amendment.

Pursuant to the Credit Agreement, the Lender loaned us $40 million (the “Credit Agreement Loan”), which was evidenced by a Term Loan Note. Pursuant to the Credit Agreement, the Company has the option (subject to certain provisions of the Credit Agreement which provides for the Lender to have the option) to select whether loans made under the Credit Agreement bear interest at (a) the greater of (i) the prime rate in effect, (ii) the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System plus ½ of 1%, (iii) the sum of (A) the Adjusted LIBOR Rate (defined below) and (B) 1%, and (iv) 4.5% per annum; or (b) the greater of (i) 1.50% and (ii) the applicable ICE Benchmark Administration Limited interest rate, divided by (x) one minus, (y) the maximum rate at which reserves (including, without limitation, any basic marginal, special, supplemental, emergency or other reserves) are required to be maintained with respect thereto against “Eurocurrency liabilities” (as such term is defined in Regulation D) under regulations issued from time to time by the Board of Governors of the Federal Reserve System or other applicable banking regulator (the “Adjusted LIBOR Rate”), in each case subject to the terms and conditions of the Credit Agreement, and in each case plus between 5.5% and 9.5% per annum (7.5% per annum prior to our entry into the Second Amendment)(as provided in the Credit Agreement, based on several factors, including the Company’s total leverage ratio). Interest on the Credit Agreement is payable monthly in arrears, provided that upon any event of default the interest rate increases to 2% per annum in excess of the applicable interest rate then in effect (4% in the event the Required Payment defined below is not timely made). The amount owed under the Credit Agreement is due and payable on May 2, 2019.

Amortizing principal payments are due on the Credit Agreement Loan in the amount of $300,000 per fiscal quarter for June 30, 2014, September 30, 2014 and December 31, 2014, and $800,000 per fiscal quarter on September 30, 2015, thereafter through maturity (no amortization payments are due on March 31, 2015 or June 30, 2015, pursuant to the terms of the Second Amendment or September 30, 2015, pursuant to the terms of the Third Amendment). Additionally, in the event (a) we receive any sale proceeds from the sale of assets or insurance proceeds (each as described in greater detail in the Credit Agreement), in excess of $250,000, we are required to pay such sale proceeds, less certain deductions, as a prepayment of the Credit Agreement Loan, unless we decide to reinvest such proceeds in long-term production assets as described in the Credit Agreement; (b) we sell equity securities (subject to certain exceptions), we are required to use 100% of the proceeds from such sales to repay the Credit Agreement Loan, subject to certain exemptions, including up to $5 million to be used for working capital, permitted acquisitions, working capital of Vertex Refining Nevada and funds (which are required to total at least $10 million) which we were able to raise prior to June 30, 2014 (subject to the terms of the Credit Agreement) through the sale of securities; (c) we issue debt, we are required to prepay the Credit Agreement Loan in an amount equal to 100% of such funds received; (d) we have cash flow which exceeds certain pre-negotiated limits, we are required to use between 50% and 75% of such additional cash flow to repay the Credit Agreement Loan; (e) we receive tax refunds in excess of $100,000 in any year, we are required to use such funds to prepay the Credit Agreement Loan; (f) our total debt exceeds certain maximum debt ratios set forth in the Credit Agreement, we are required to immediately repay the Credit Agreement Loan in an amount equal to such excess debt; or (g) we receive any funds under the Omega Purchase Agreement, we are required to prepay the Credit Agreement Loan in an amount equal to such received funds, subject in each case to the terms and conditions of the Credit Agreement. We also have the right to make voluntary repayments of the Credit Agreement Loan in the minimum amount of $500,000 (and in multiples of $100,000) from time to time.

Except with respect to certain accounts, certain finished goods inventory and certain other reserves described in the Amended BOA Credit Agreement prior to March 26, 2015, and the MidCap Loan Agreement (described below) subsequent to March 26, 2015, the amount owed pursuant to the Credit Agreement is secured by a first priority security interest in all of our assets and all of the assets and securities of our direct and indirect subsidiaries and is also guaranteed by our subsidiaries pursuant to the terms of the Credit Agreement, a Pledge and Security Agreement and Mortgage (providing a security interest over certain of our real

27



property assets). The Credit Agreement contains customary representations, warranties, covenants for facilities of similar nature and size as the Credit Agreement, and requirements for the Company to indemnify the Lender and the Agent for certain losses.

The Credit Agreement also includes various covenants (positive and negative) binding the Company, including, requiring that the Company provide the Agent with certain reports, provide the Agent notice of material corporate events and forecasts, limiting the amount of indebtedness the Company may incur (for example, the Company’s total indebtedness could not exceed between $30,000,000-$32,000,000 at any time prior to our entry into the Second Amendment to the Credit Agreement on March 26, 2015 (the “Second Amendment”), and cannot exceed $7 million (including not more than $6 million under the MidCap Credit Agreement through December 31, 2015), subject to certain exemptions set forth in greater detail in the Credit Agreement), and requiring us to maintain certain financial ratios, relating to consolidated EBITDA (which for the purposes of the Credit Agreement, never take into account the results of operations of Vertex Refining OH, LLC (“Vertex OH”)) and debt leverage including maintaining a ratio of quarterly consolidated EBITDA (as calculated and adjusted in the Credit Agreement) to certain fixed charges (quarterly on a cumulative basis), for each applicable period of between 0.90:1.00 and 1.25:1.00 (depending on the applicable period); maintaining a ratio of consolidated debt to consolidated EBITDA (as calculated and adjusted in the Credit Agreement), for the applicable period (depending on the terms of the Credit Agreement such calculation is made for the prior 12 month period, the prior six month period or prior nine month period), for each quarter through maturity of between 4:00:1.00 and 2.5:1.00 (depending on the applicable period); maintaining consolidated EBITDA (as calculated and adjusted in the Credit Agreement), for each applicable period (as provided in the Credit Agreement), of between $4.25 million and $11.5 million between the original date of the Credit Agreement and December 31, 2014, and between $250,000 and $9.5 million thereafter through the maturity date of the Credit Agreement (depending on the applicable quarter); maintaining at all times liquid cash on hand and available borrowings under other applicable credit agreements of at least $3 million through the date of the Second Amendment and of at least $750,000 after the date of the Second Amendment prior to June 30, 2015, $1.5 million at any time after June 30, 2015 and prior to December 31, 2015, $2 million at any time after December 31, 2015 and prior to June 30, 2016, and $2.5 million at any time after June 30, 2016 and prior to December 31, 2016, and $3 million at any time after December 31, 2016; and requiring Vertex OH to maintain not less than $500,000 in cash at all times. The Credit Agreement also provides that the Company is not authorized to make any “earn-out” payment under the Heartland Purchase Agreement, if an event of default exists under the Credit Agreement or if such payment would create an event of default under the Credit Agreement. Additionally, pursuant to the Second Amendment, we were required to raise at least $9.1 million by June 30, 2015, through the sale of equity, and pay such funds to the Lender as a mandatory pre-payment of the amounts due under the Credit Agreement (the “Required Payment”). The Credit Agreement also includes customary events of default for facilities of a similar nature and size as the Credit Agreement.

We also agreed to (a) pay the Agent a fee of $50,000 per year (including $50,000 paid upon our entry into the Second Amendment) as an administration fee pursuant to a fee letter with the Lender; and (b) agreed to pay the Agent certain prepayment fees in the event we prepay amounts owed under the Credit Agreement prior to March 26, 2018, provided no prepayment fee is due in connection with the Required Payment or certain other mandatory prepayments required under the terms of the Credit Agreement, subject to certain exceptions.

The proceeds from the Credit Agreement were used to pay the amounts due at the Initial Closing of the Omega purchase (described above), pay certain Omega capital leases and other obligations of Omega, and to pay expenses associated with the Initial Closing of the Omega acquisition. The Credit Agreement had a balance of $24,000,000 as of June 30, 2015.

As additional consideration for the Lender agreeing to the terms of the Second Amendment, we granted Goldman, Sachs & Co., an affiliate of the Lender (such initial holder and its assigns, if any, the “Holder”) a warrant to purchase 1,766,874 shares of our common stock which was evidenced by a Common Stock Purchase Warrant (the “Lender Warrant”). The Lender Warrant was to expire on March 26, 2022 and originally had an exercise price equal to the lower of (x) $3.39583 per share; and (y) the lowest price per share at which we issue any common stock (or set an exercise price for the purchase of common stock) between the date of our entry into the Lender Warrant and June 30, 2015. The Lender Warrant was exercisable by the Holder at any time after September 1, 2015, including pursuant to a cashless exercise. The Lender Warrant provided that in the event that, prior to June 30, 2015, we prepaid the amount owed under the Credit Agreement in an amount greater than $9.1 million (i.e., in an amount greater than the Required Payment) then the number of shares of common stock issuable upon exercise of the Lender Warrant is reduced by the pro rata amount by which the amount prepaid exceeds $9.1 million and is less than $15.1 million, provided that if prior to June 30, 2015 we prepaid at least $6 million in addition to the Required Payment the Lender Warrant automatically terminated.

As additional consideration for the Lender agreeing to the terms of the Third Amendment, we agreed to modify, pursuant to a First Amendment to Warrant, the terms of the Lender Warrant. Pursuant to the First Amendment to Warrant, we agreed to reduce the exercise price of the Lender Warrant to $2.778 per share (the 30 day volume weighted average price of our common stock as of the date of our entry into the Third Amendment) from $3.395828553 per share, and that in the event we issued any preferred stock, that the lowest exercise price associated with any warrants or similar convertible securities issued in connection with such preferred

28



stock offering would become the exercise price of the Lender Warrant; provided that, if the Company did not issue preferred stock on or prior to June 30, 2015, then the exercise price of the Lender Warrant would be reduced to the lowest closing price per share of our common stock on any date between March 26, 2015 and June 30, 2015.

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

MidCap Loan Agreement

Effective March 27, 2015, the Company, Vertex Operating and all of the Company’s other subsidiaries other than E-Source and Golden State, entered into a Loan and Security Agreement with MidCap Business Credit LLC (“MidCap” and the “MidCap Loan Agreement”). Pursuant to the MidCap Loan Agreement, MidCap agreed to loan us up to the lesser of (i) $7 million; and (ii) 85% of the amount of accounts receivable due to us which meet certain requirements set forth in the MidCap Loan Agreement (“Qualified Accounts”), plus the lesser of (y) $3 million and (z) 50% of the cost or market value, whichever is lower, of our raw material and finished goods which have not yet been sold, subject to the terms and conditions of the MidCap Loan Agreement (“Eligible Inventory”), minus any amount which MidCap may require from time to time in order to over secure amounts owed to MidCap under the MidCap Loan Agreement, as long as no event of default has occurred or is continuing under the terms of the MidCap Loan Agreement. The requirement of MidCap to make loans under the MidCap Loan Agreement is subject to certain standard conditions and requirements. Notwithstanding the above, the parties agreed that until such time as (i) we raise funds sufficient to pay the Required Payment (defined above), or (ii) we enter into an amendment with the Lender to remove the requirement that we make the Required Payment, the advance rate against Qualified Accounts is reduced to 53% (compared to 85% after such date) and the advance rate against Eligible Inventory is reduced to 31% (compared to 50% after such date). Additionally, the advance rate against Qualified Accounts is reduced by 1% for each percentage point by which the following calculation, expressed as a percentage, exceeds 3%: (a) actual bad debt write-downs, discounts, advertising allowances, credits, or other dilutive items, divided by (b) gross sales (excluding non-recurring items), for any applicable period as determined by MidCap. The MidCap Loan had a balance of $1,815,795 on June 30, 2015.

We are required to make immediate pre-payments of outstanding principal owed under the MidCap Note in the amount certain thresholds are exceeded as set forth in the MidCap Loan Agreement. We are also required to provide MidCap certain monthly reports and accountings. We agreed to pay MidCap certain fees in connection with the MidCap Loan Agreement including (a) a non-refundable fee equal to 0.75% of the $7 million credit limit ($52,500), which was due upon our entry into the MidCap Loan Agreement, and is due on each anniversary thereafter; (b) reimbursement for MidCap’s audit fees incurred from time to time; a collateral monitoring charge of 0.20% of the greater of the average outstanding balance of the MidCap Note (as defined below) at the end of each month or $3 million; (c) a fee equal to 0.75% of the difference between the credit limit of $7 million and the greater of (i) the amount actually borrowed, and (ii) $3 million, as calculated in the MidCap Loan Agreement, payable monthly in arrears and added to the balance of the MidCap Note; and (d) a one-time placement fee equal to 0.50% of the $7 million credit limit which we paid upon our entry into the MidCap Loan Agreement.

The MidCap Loan Agreement contains customary representations, warranties, covenants for facilities of similar nature and size as the MidCap Loan Agreement, and requirements for the Company to indemnify MidCap for certain losses. The Credit Agreement also includes various covenants (positive and negative), binding the Company and its subsidiaries, including not permitting the availability for loans under the MidCap Loan Agreement to ever be less than 10% of the credit limit ($700,000); prohibiting us from creating liens on any collateral pledged under the MidCap Loan Agreement, subject to certain exceptions; and prohibiting us from paying any dividends on capital stock, advancing any money to any person, guarantying any debt, creating any indebtedness, and entering into any transactions with affiliates on terms more favorable than those of an arms-length third party transaction. The MidCap Loan Agreement also includes customary events of default for facilities of a similar nature and size as the MidCap Loan Agreement.

The MidCap Loan Agreement continues in effect until the second anniversary of the parties’ entry into the Agreement, subject to the right of the parties, subject to mutual agreement, to extend such rights and agreement, provided that we have the right to terminate the MidCap Loan Agreement at any time with 60 days prior written notice. In the event we desire to terminate the MidCap Loan Agreement we are required to pay MidCap a termination fee of $70,000, subject to certain exceptions in the MidCap Loan Agreement. We also have the right to terminate the agreement without providing 60 days’ prior notice as long as we pay MidCap the equivalent amount of interest which would have been due (as calculated in the MidCap Loan Agreement) for such 60 day period, along with the $70,000 termination fee. In the event the MidCap Loan Agreement is terminated by MidCap upon the occurrence of an event of default, we are required to pay MidCap a fee of $70,000 upon such termination. We also entered into a Revolving Note (the “MidCap Note”) to evidence amounts borrowed from MidCap from time to time under the MidCap Loan Agreement. Interest on the MidCap Note accrues at a fluctuating rate equal to the aggregate of: (x) the prime rate then effect, and (y) 1.75% per annum, or at such other rate mutually agreed on from time to time by the parties, based upon the greater of (i)

29



any balance owing under the MidCap Note at the close of each day; or (ii) a minimum assumed average daily loan balance of $3 million. Interest is payable in arrears, on the first day of each month that amounts are outstanding under the MidCap Note.

We and each of our subsidiaries subject to the MidCap Loan Agreement are jointly and severally liable for the repayment of amounts owed under the MidCap Note. Pursuant to the MidCap Loan Agreement, we granted MidCap a security interest in substantially all of our assets and provided MidCap junior mortgages on all real estate which we own, subject to the first priority mortgages of the Lender. Finally, MidCap and the Lender entered into an Intercreditor Agreement, which governs which of the lenders have first and second priority security interests over our assets which are pledged as collateral in order to secure repayment of the amounts owed pursuant to the Credit Agreement and MidCap Loan Agreement.

Compliance with Covenants and Fulfillment of Conditions:

On June 18, 2015, the Company entered into the Third Amendment to Credit and Guaranty Agreement (the "Third Amendment"), which amended the Credit Agreement (defined above). The amendments to the Credit Agreement effected by the Third Amendment include, but are not limited to:

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

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

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

Reducing certain required consolidated EBITDA targets pursuant to the terms of the Credit Agreement to be more favorable to the Company, including reducing such targets t $250,000, $1.5 million, $4.24 million, $7.25 million and $9.5 million for the quarters ended September 31, 2015, December 31, 2015, March 31, 2016, June 30, 2016 and September 30, 2016 (and each quarter thereafter), respectively, compared to $3 million, $5.5 million, $8 million, $9 million and $10 million, respectively.

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

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


Omega Secured Note

In connection with the Initial Closing of the Omega Purchase Agreement (described above under “Part I” - “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” - “ Material Acquisitions” - “Omega Acquisition”), Omega Refining and Bango Refining provided Vertex Refining Nevada a Secured Promissory Note (the “Omega Secured Note”) in the aggregate amount of $13,858,067, which had a balance of $13,858,067 as of June 30, 2015, representing (a) a loan to Omega in the amount of approximately $7.56 million (representing the agreed upon value of the amount by which the consideration paid at the Initial Closing (which included consideration relating to the assets acquired at the Initial Closing and which were planned to be acquired at the Final Closing) exceeded the value of assets acquired at the Initial Closing) (the “Purchase Price Loan”); (b) a $750,000 loan related to the delivery of a certain amount of used motor oil inventory at the Initial Closing (the “First Inventory Loan”); (c) a $1,400,000 loan related to the delivery of a certain amount of used motor oil inventory which was planned to be acquired at the Final Closing (the “Second Inventory Loan” and along with the First Inventory Loan, the “Inventory Loans”); (d) advances totaling $4.15 million to satisfy accounts payable and other working capital related obligations of Omega after the Initial Closing (the “Draw Down Loans”); and (e) an additional loan of $1 million for capital expenditures (the “Capital Expenditure Loan”).


30



The Purchase Price Loan and the Draw Down Loans accrued interest at the short-term federal rate as published by the Internal Revenue Service from time to time (approximately 0.33% per annum as of the Initial Closing) prior to October 30, 2014, and thereafter at 9.5% per annum, payable monthly in arrears and have a maturity date of March 31, 2015. The First Inventory Loan and the Draw Down Loans accrue interest at the rate of 9.5% per annum beginning on May 31, 2014, were due and payable on March 31, 2015, and were not paid on such date and are currently in default.

The repayment of the Secured Note is guaranteed by Omega Holdings pursuant to a Guaranty Agreement and secured by a security interest granted pursuant to the terms of the Secured Note and a Leasehold Deed of Trust, Security Agreement, Assignment of Leases and Rents and Fixture Filing. Additionally, we have the right to set-off any amount due upon an event of default under the Secured Note against certain of the shares pledged by Omega in connection with the Initial Closing and the earnout consideration due to Omega (provided that we have determined that no earn-out consideration will be due to Omega), subject to the terms of the Asset Purchase Agreement.

It is anticipated that Vertex Refining Nevada will acquire certain personal property leased from Omega Refining and Bango Refining under a Personal Property Lease at the termination of the Personal Property Lease pursuant to Article 9 of the Uniform Commercial Code, with such acquisition occurring through an offset of a portion of the amount due Vertex Refining Nevada under the Omega Secured Note.

Omega Secured Note had an outstanding balance of $13,858,067 as of June 30, 2015, provided that based on our management’s assessment, the Company recognized an allowance for doubtful accounts of $4,346,452 related to amounts owed to the Company by Omega under the Omega Secured Note during the three months ended March 31, 2015.

Texas Citizens Bank Loan Agreement

On January 7, 2015, E-Source entered into a loan agreement with Texas Citizens Bank to consolidate various smaller debt obligations. The loan Agreement provides a term note in the amount of $2,045,500 that matures on January 7, 2020. Borrowings bear a fixed interest rate of 5.5% per annum and interest is calculated from the date of each advance until repayment in full or maturity. The loan has 59 scheduled monthly payments of $45,147 which includes principal and interest. The loan is collateralized by all of the assets of E-Source. The loan contains customary representations, warranties, and covenants for facilities of similar nature and size.
 
Unit Offering

As described above under “Part I” - “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” - “Recent Events” - “Unit Offering”, we closed the Offering of Units on June 24, 2015 and raised a gross amount of $25 million and a net of $23.6 million, after commissions and before our expenses, of which $15.1 million was immediately used to pay down amounts owed to our Lender under the Credit Agreement.

Need for additional funding

Our re-refining business will require significant capital to design and construct any new facilities. The facility infrastructure would be an additional capitalized expenditure to these proposed process costs and would depend on the location and site specifics of the facility.

Management believes that the amount remaining from our June 2015 Unit Offering (described above) and the amount available under our MidCap Loan Agreement, in addition to projected earnings, will provide sufficient liquidity to fund our operations for the foreseeable future, although we may seek additional financing to fund acquisitions or other developments in the future and to repay amounts owed to our senior creditor. We may raise funds in the future through the sale of common stock, preferred stock, debt, or convertible debt, which may include the grant of warrants. We may also seek to obtain sufficient funding to completely refinance the Goldman and/or MidCap debt subsequent to the date of this filing which may take any or all of the forms described above.

Additionally, as part of our ongoing efforts to maintain a capital structure that is closely aligned with what we believe to be the potential of our business and goals for future growth, which is subject to cyclical changes in commodity prices, we will be exploring additional sources of external liquidity.  The receptiveness of the capital markets to an offering of debt or equities cannot be assured and may be negatively impacted by, among other things, debt maturities, current market conditions, and potential stockholder dilution. The sale of additional securities, if undertaken by us and if accomplished, may result in dilution to our shareholders. We cannot assure you, however, that future financing will be available in amounts or on terms acceptable to us, or at all.

31




In addition to the above, we may also seek to acquire additional businesses or assets (similar to our recent acquisitions from Heartland, Omega and Aaron Oil (as described below under “Item 5. Other Information” - “Aaron Oil Acquisition”), and our acquisition of E-Source. Finally, in the event we deem such transaction in our best interest, we may enter into a business combination or similar transaction in the future.

There is currently only a limited market for our common stock, and as such, we anticipate that such market will be illiquid, sporadic and subject to wide fluctuations in response to several factors moving forward, including, but not limited to:

(1)
actual or anticipated variations in our results of operations;

(2)
the market for, and volatility in, the market for oil and gas; 

(3)
our ability or inability to generate new revenues; and
(4)
the number of shares in our public float.

Furthermore, because our common stock is traded on the NASDAQ Capital Market, our stock price may be impacted by factors that are unrelated or disproportionate to our operating performance. These market fluctuations, as well as general economic, political and market conditions, such as recessions, interest rates or international currency fluctuations may adversely affect the market price of our common stock. Additionally, at present, we have a limited number of shares in our public float, and as a result, there could be extreme fluctuations in the price of our common stock.

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

Cash flows for the six months ended June 30, 2015 compared to the six months ended June 30, 2014

 
 
Six Months Ended June 30,
 
 
2015
 
2014
Beginning cash and cash equivalents
 
$
6,017,076

 
$
2,678,628

Net cash provided by (used in):
 
 

 
 

Operating activities
 
(7,605,437
)
 
3,631,402

Investing activities
 
(1,691,740
)
 
(31,399,981
)
Financing activities
 
8,997,644

 
44,741,782

Net increase (decrease)  in cash and cash equivalents
 
(299,533
)
 
16,973,203

Ending cash and cash equivalents
 
$
5,717,543

 
$
19,651,831


Net cash used in operating activities was $7,605,437 for the six months ended June 30, 2015 as compared to $3,631,402 of net cash provided by operating activities during the corresponding period in 2014. Our primary sources of liquidity are cash flows from our operations and the availability to borrow funds under our Credit Agreement, notes payable, and MidCap Loan Agreement. The primary reasons for the decrease in cash provided by operating activities for the six month period ended June 30, 2015 are related to the net loss of $17,411,650 (compared to net income of $7,537,848 in the prior period), an increase in accounts receivable of $3,096,566 and an increase in prepaid expenses of $327,343. These cash outflows were partially offset by favorable adjustments for depreciation and amortization expenses of $3,118,296, a decrease in inventory of $3,532,326 costs in excess of billings of $779,285, $61,713 of deferred revenue, $2,650,000 of allowance for doubtful accounts, and a decrease in accounts payable of $640,352 and deferred federal income tax of $5,306,000 for the six month period ended June 30, 2015.

Investing activities used cash of $1,691,740 for the six months ended June 30, 2015 as compared to having used $31,399,981 of cash during the corresponding period in 2014. Investing activities for the six months ended June 30, 2015 were primarily comprised of $1,196,240 invested in fixed assets, offset by $4,500 of proceeds from the sale of assets.


32



Financing activities provided cash of $8,997,644 for the six months ended June 30, 2015 as compared to $44,741,782 of cash during the corresponding period in 2014. Financing activities for the six months ended June 30, 2015 are comprised of proceeds from the sale of stock of $23,557,552 as part of our June 2015 Unit offering as described above, which was significantly offset by payments on notes payable in the amount of $16,375,703 (which represents amounts paid to our Lender under the Credit Agreement), amounts received from the MidCap Loan Agreement of $1,815,795 which were partially offset by payments made on notes receivable of $500,000.

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, legal matters, derivative liabilities, valuation of warrants and beneficial conversion feature on preferred shares. Actual results may differ from these estimates.

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

Stock Based Compensation
 
We account 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. We estimate 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. We believe 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 Income/ Loss per Share
 
Basic and diluted income/loss per share has been calculated based on the weighted average number of shares of common stock outstanding during the period.
 
Income Taxes
 
We account for income taxes in accordance with the FASB ASC Topic 740. We record 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. We consider, 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.

Derivative Liabilities

The Company, in accordance with ACS 815-40-25 and ASC 815-10-15 Derivatives and Hedging and ASC 480-10-25 Liabilities-Distinguishing from Equity, convertible preferred shares are accounted for net, outside of shareholder's equity and warrants are

33



accounted for as liabilities at their fair value during periods where they can be net cash settled in case of a change in control transaction.

The warrants are accounted for as a liability at their fair value at each reporting period. The value of the derivative warrant liability will be re-measured at each reporting period with changes in fair value recorded as earnings. To derive an estimate of the fair value of these warrants, a binomial model is utilized that computes the impact of a possible change in control transaction upon the exercise of the warrant shares. This process relies upon inputs such as shares outstanding, estimated stock prices, strike price and volatility assumptions to dynamically adjust the payoff of the warrants in the presence of the dilution effect.

Preferred Stock Classification

FASB establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. A mandatorily redeemable financial instrument shall be classified as a liability unless the redemption is required to occur only upon liquidation or termination of the reporting entity.

A financial instrument issued in the form of shares is mandatorily redeemable if it embodies an unconditional obligation requiring the issuer to redeem the instrument by transferring its assets at a specified or determinable date (or dates) or upon an event certain to occur. A financial instrument that embodies a conditional obligation to redeem the instrument by transferring assets upon an event not certain to occur becomes mandatorily redeemable-and, therefore, becomes a liability-if that event occurs, the condition is resolved, or the event becomes certain to occur.

The Series B Preferred Stock is required to be redeemed by the Company on the fifth anniversary of the issuance of the Series B Preferred Stock if the redemption would not be subject to then existing restrictions under the Company's senior credit agreement that prohibits redemption. SEC reporting requirements provide that any possible redemption outside of the control of the Company requires the preferred stock to the classified outside of permanent equity.

Business Combinations

We accounted for the acquisition in accordance with FASB topic 805. The acquisition was accounted for under the purchase method of accounting. The transaction resulted in a bargain purchase and was recognized in the net income as an acquisition date gain.

Market Risk

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to interest rate risks primarily through borrowings under various bank facilities.  Interest on these facilities is based upon variable interest rates using LIBOR or Prime as the base rate.

We are exposed to market risks related to the volatility of crude oil and refined oil products. Our financial results can be
significantly affected by changes in these prices which are driven by global economic and market conditions. We attempt to mitigate much of the risk associated with the volatility of relevant commodity prices by using our knowledge of the market to obtain feedstock at attractive costs, by efficiently managing the logistics associated with our products, by turning our inventory over quickly, and by selling our products into markets where we believe we can achieve the greatest value. We believe that the current downward trend in natural gas prices coupled with increasing crude oil prices provides an attractive margin opportunity for our TCEP finished product.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We have established and maintain a system of disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports filed with the Securities and Exchange Commission pursuant to the Securities

34



Exchange Act of 1934 , as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Commission and that such information is accumulated and communicated to our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), as appropriate, to allow timely decisions regarding required disclosures.

Management, with the participation of our CEO and CFO, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. As of June 30, 2015, based on the evaluation of these disclosure controls and procedures, and in light of the material weaknesses found in our internal controls over financial reporting as of December 31, 2014 (as described in greater detail in our annual report on Form 10-K for the year ended December 31, 2014), our CEO and CFO have concluded that our disclosure controls and procedures were not effective to provide reasonable assurance that information required to be disclosed in our reports filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Commission and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosures.

In light of the material weaknesses described above, we have performed additional analysis and other post-quarter procedures to ensure our consolidated financial statements are prepared in accordance with generally accepted accounting principles. Accordingly, management has concluded that the financial statements fairly present in all material respects our financial condition, results of operations and cash flows as at, and for, the periods presented in this report.

Changes in Internal Control Over Financial Reporting

We regularly review our system of internal control over financial reporting to ensure we maintain an effective internal control environment. There were no changes in our internal control over financial reporting that occurred during the 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.


35



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 and Vertex Refining LA, LLC, the wholly-owned subsidiary of Vertex Operating, our wholly-owned subsidiary, were named as defendants, along with Plaquemines Holdings, L.L.C. (“Plaquemines”), in a lawsuit filed in the United States District Court For the Eastern District of Louisiana (Civil Action No. 15-1198) on June 11, 2015 by CHS Inc. (“CHS”). The lawsuit is in connection with our planned construction of a barge dock on property leased by Vertex Refining LA from Plaquemines in Myrtle Grove, Louisiana. The suit seeks certain declaratory and injunctive relief related to the planned location and construction of the barge dock, including that a location proposed by CHS is proper, the prior location proposed by us is no longer valid, and that we be enjoined from constructing a barge dock for any purpose other than servicing a used oil refinery or other qualifying plan. We intend to vigorously defend ourselves and oppose the relief sought in the complaint, provided that at this stage of the litigation, the Company has no basis of determining whether there is any likelihood of material loss associated with the claims and/or the potential and/or the outcome of the litigation.

Vertex Refining LA, LLC, the wholly-owned subsidiary of Vertex Operating, our wholly-owned subsidiary, was named as a defendant in a lawsuit filed in the Twenty-Fourth Judicial District For the Parish of Jefferson Louisiana on January 6, 2015. Pursuant to the lawsuit, Stacy Davis, Becky Vallee and James A. Block (the “Plaintiffs”) made certain allegations against Vertex Refining LA, LLC, Omega Refining and the manager of the Marrero, Louisiana facility (the “Defendants”). The claims are structured as class actions relating to certain operations performed at our newly acquired re-refinery located in Marrero, Louisiana, including the alleged emission of noxious and harmful substances. The Plaintiffs allege they are part of a valid class due to the fact that they live and work near the facility. The lawsuit relates to alleged actions and inactions related to the facility between 2012 to present and includes allegations relating to violations of various Louisiana statutes, allegations relating to the misrepresentation of information to the Louisiana Department of Environmental Quality, allegations relating to violations of hourly permitted emission limits, and alleged failure to report an un-permitted point-source. The suit seeks damages for physical and emotional injuries, pain and suffering, medical expenses and deprivation of the use and enjoyment of Plaintiffs’ homes. The Plaintiffs further allege that there are estimated to be over 1,000 class members to the suit, provided that the proposed class is yet to be certified. We intend to vigorously defend ourselves against the allegations made in the complaint, provided that at this stage of the litigation, the Company has no basis of determining whether there is any likelihood of material loss associated with the claims and/or the potential outcome of the litigation.

On or around April 29, 2015, we, Vertex Refining Nevada, Bango Oil (our landlord under a lease relating to our Churchill, Nevada facility (the “Bango Plant”), described in greater detail above under “Part I” - “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” - “Recent Events” - “Churchill County, Nevada Lease”, Bango Refining, Omega Holdings, and various other parties, were sued by Republic Bank, Inc. (“Republic”), in the Tenth Judicial District Court in and for Churchill County, Nevada (Case No. 15-10DC0502). Pursuant to the lawsuit, Republic, made various claims against the named defendants including, (i) alleging a default on certain lease obligations which Republic and Bango Refining were party to, relating to leased equipment used at the Bango Plant; (ii) alleging the liability of certain guarantors of the equipment lease including Omega Holdings in connection with the amounts alleged due under the equipment lease; (iii) requesting confirmation of Republic’s security interest in the equipment; (iv) alleging a breach of contract in connection with the lease agreement (including the allegation that we breached various contracts with Republic in connection with the Omega acquisition and our failure to complete the final closing thereunder); and (v) alleging unjust enrichment against us in connection with the use of the lease equipment subject to the lease agreement. Pursuant to the lawsuit, Republic is asking for damages of approximately $2.9 million, plus interest and fees, a declaratory judgment against Bango Oil confirming that Republic’s security interest in the equipment is perfected and senior to the security interest of Bango Oil, and joint and several liability against all defendants (including us) for the damages alleged due (including in connection with the breach of contract and unjust enrichment claims). We have not yet responded to the claims made by Republic however, we intend to vigorously defend ourselves against the allegations made in the complaint, provided that at this stage of the litigation, the Company has no basis of determining whether there is any likelihood of material loss associated with the claims and/or the potential outcome of the litigation.

E-Source, the wholly-owned subsidiary of Vertex Operating, was named as a defendant (along with Motiva Enterprises, LLC, ("Motiva")) in a lawsuit filed in the Sixtieth (60th) Judicial District, Jefferson County, Texas, on April 22, 2015. Pursuant to the lawsuit, Whole Environmental, Inc., made certain allegations against E-Source, and Motiva. The claims include Breach of Contract and Quantum Meruit actions relating to asbestos abatement and remediation operations performed for defendants' at Motiva's facility in Port Arthur, Jefferson County, Texas. The plaintiff alleges it is due monies earned. Defendants have denied any amounts due plaintiff. The suit seeks damages of approximately $864,000, along with pre-judgment and post-judgment interest, the fair

36



value of certain property alleged to be converted by defendants and reimbursement of legal fees.. We intend to vigorously defend ourselves against the allegations made in the complaint. The Company has no basis of determining whether there is any likelihood of material loss associated with the claims and/or the potential and/or the outcome of the litigation.

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/A for the year ended December 31, 2014, filed with the Commission on April 15, 2015, except as provided below and investors should review the risks provided below and in the Form 10-K/A, prior to making an investment in the Company.


GENERAL RISKS RELATING TO OUR BUSINESS AND INDUSTRY

We will need to raise additional capital to meet the requirements of the terms and conditions of our Credit Agreement and to fund future acquisitions and our ability to obtain the necessary funding is uncertain.

We will need to raise additional funding to meet the requirements of the terms and conditions of our Credit Agreement. Additionally, we may need to raise additional funds through public or private debt or equity financing or through other various means to fund our obligations, or acquire assets and businesses in the future. In such a case, adequate funds may not be available when needed or may not be available on favorable terms. If we need to raise additional funds in the future, by issuing equity securities, dilution to existing stockholders will result, and such securities may have rights, preferences and privileges senior to those of our common stock. If funding is insufficient at any time in the future and we are unable to generate sufficient revenue from new business arrangements, to complete planned acquisitions or operations, our results of operations and the value of our securities could be adversely affected. Future funding may not be available on favorable terms, if at all.

We may not be able to generate sufficient cash flow to meet our debt service and other obligations due to events beyond our control.

Our ability to generate cash flows from operations, to make scheduled payments on or refinance our indebtedness and to fund working capital needs and planned capital expenditures will depend on our future financial performance and our ability to generate cash in the future. Our future financial performance will be affected by a range of economic, financial, competitive, business and other factors that we cannot control, such as general economic, legislative, regulatory and financial conditions in our industry, the economy generally, the price of oil and other risks described in our other reports filed with the SEC. A significant reduction in operating cash flows resulting from changes in economic, legislative or regulatory conditions, increased competition or other events beyond our control could increase the need for additional or alternative sources of liquidity and could have a material adverse effect on our business, financial condition, results of operations, prospects and our ability to service our debt and other obligations. If we are unable to service our indebtedness or to fund our other liquidity needs, we may be forced to adopt an alternative strategy that may include actions such as reducing or delaying capital expenditures, selling assets, restructuring or refinancing our indebtedness, seeking additional capital, or any combination of the foregoing. If we raise additional debt, it would increase our interest expense, leverage and our operating and financial costs. We cannot assure you that any of these alternative strategies could be affected on satisfactory terms, if at all, or that they would yield sufficient funds to make required payments on our indebtedness or to fund our other liquidity needs. Reducing or delaying capital expenditures or selling assets could delay future cash flows. In addition, the terms of existing or future debt agreements may restrict us from adopting any of these alternatives. We cannot assure you that our business will generate sufficient cash flows from operations or that future borrowings will be available in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs.

If for any reason we are unable to meet our debt service and repayment obligations, we would be in default under the terms of the agreements governing our indebtedness, which would allow our creditors at that time to declare all outstanding indebtedness to be due and payable. This would likely in turn trigger cross-acceleration or cross-default rights between our applicable debt agreements. Under these circumstances, our lenders could compel us to apply all of our available cash to repay our borrowings. In addition, the lenders under our credit facilities or other secured indebtedness could seek to foreclose on our assets that are their collateral. If the amounts outstanding under our indebtedness were to be accelerated, or were the subject of foreclosure actions, our assets may not be sufficient to repay in full the money owed to the lenders or to our other debt holders.


37



We are currently owed a significant amount of money from Omega Holdings Company, LLC and related entities, which amount is in default, and we may be unable to collect on the full amount of such note.

The Omega Secured Note had an outstanding balance of $13,858,067 as of March 31, 2015. not including a $4.3 million allowance for doubtful accounts in connection with such note (described below). The Omega Secured Note represents (a) a loan to Omega in the amount of approximately $7.56 million (representing the agreed upon value of the amount by which the consideration paid at the initial closing of the Omega acquisition (which included consideration relating to the assets acquired at the initial closing and which were planned to be acquired at the final closing, which has since been terminated by the parties) exceeded the value of assets acquired at the initial closing) (the “Purchase Price Loan”); (b) a $750,000 loan related to the delivery of a certain amount of used motor oil inventory at the initial closing (the “First Inventory Loan”); (c) a $1,400,000 loan related to the delivery of a certain amount of used motor oil inventory which was planned to be acquired at the final closing, which the parties have agreed will now not occur (the “Second Inventory Loan” and along with the First Inventory Loan, the “Inventory Loans”); (d) advances totaling $4.15 million to satisfy accounts payable and other working capital related obligations of Omega after the initial closing (the “Draw Down Loans”); and (e) an additional loan of $1 million for capital expenditures (the “Capital Expenditure Loan”).

The Purchase Price Loan and the Draw Down Loans accrued interest at the short-term federal rate as published by the Internal Revenue Service from time to time (approximately 0.33% per annum as of the initial closing) prior to October 30, 2014, and thereafter at 9.5% per annum, payable monthly in arrears and had a maturity date of March 31, 2015. The First Inventory Loan and the Draw Down Loans accrued interest at the rate of 9.5% per annum beginning on May 31, 2014, and were due and payable on March 31, 2015. None of the amounts due under the Omega Secured Note were paid when due on March 31, 2015, and such amounts are currently in default. Upon an event of default under any of the loans, the loans accrue interest at 18% per annum until paid in full, and such note is currently accruing 18% per annum.

Based on our management’s assessment, the Company recognized an allowance for doubtful accounts of $4,346,452 related to amounts owed to the Company by Omega under the Omega Secured Note during the three months ended March 31, 2015.

The repayment of the Secured Note is guaranteed by Omega pursuant to a Guaranty Agreement and secured by a security interest granted pursuant to the terms of the Secured Note and a Leasehold Deed of Trust, Security Agreement, Assignment of Leases and Rents and Fixture Filing. Additionally, we have the right to set-off any amount due upon an event of default under the Omega Secured Note against certain of the shares pledged by Omega in connection with the initial closing and the earn-out consideration due to Omega (provided that we have determined that no earn-out consideration will be due to Omega), subject to the terms of an Asset Purchase Agreement entered into with Omega.

In the event Omega does not have sufficient cash on hand to repay the Omega Secured Note, we may be forced to attempt to enforce our security interests over Omega’s assets in an attempt to satisfy such note. Such actions could take significant time and resources, and we may ultimately not be able to receive the full value of the amounts owed to us pursuant to the terms of the Omega Secured Note. In the event we do not receive the full amounts owed pursuant to the Omega Secured Note, it could have a material adverse effect on our cash flows, debt covenants and negatively impact the amount of cash we have on hand and the amount of additional funding we are required to raise moving forward. Additionally, the value of our securities may decline in value upon such event.

We have substantial indebtedness which could adversely affect our financial flexibility and our competitive position. Our debt agreements have previously been declared in default, and our future failure to comply with financial covenants in our debt agreements could result in such debt agreements again being declared in default.

We have a significant amount of outstanding indebtedness. As of June 30, 2015, we owed approximately $21.1 million in accounts payable. As of June 30, 2015, we owed $24,000,000 under the Credit Agreement. The amount owed under the Credit Agreement is due and payable on May 2, 2019 and we were previously in default of the provisions of the Credit Agreement, which were waived by our lender in connection with our entry into an amendment to the Credit Agreement. Effective March 27, 2015, we, Vertex Operating and all of our other subsidiaries other than E-Source and Golden State, entered into the MidCap Loan Agreement. Pursuant to the MidCap Loan Agreement, MidCap agreed to loan us up to the lesser of (i) $7 million; and (ii) 85% of the amount of accounts receivable due to us which meet certain requirements set forth in the MidCap Loan Agreement (“Qualified Accounts”), plus the lesser of (y) $3 million and (z) 50% of the cost or market value, whichever is lower, of our raw material and finished goods which have not yet been sold, subject to the terms and conditions of the MidCap Loan Agreement (“Eligible Inventory”), minus any amount which MidCap may require from time to time in order to over secure amounts owed to MidCap under the MidCap Loan Agreement, as long as no event of default has occurred or is continuing under the terms of the MidCap Loan Agreement. The requirement of MidCap to make loans under the MidCap Loan Agreement is subject to certain standard conditions and requirements. A total of $1.4 million has been drawn under the MidCap Loan Agreement to date.


38



Our substantial indebtedness could have important consequences and significant effects on our business. For example, it could:
increase our vulnerability to adverse changes in general economic, industry and competitive conditions;
require us to dedicate a substantial portion of our cash flow from operations to make payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes;
restrict us from taking advantage of business opportunities;
make it more difficult to satisfy our financial obligations;
place us at a competitive disadvantage compared to our competitors that have less debt obligations; and
limit our ability to borrow additional funds for working capital, capital expenditures, acquisitions, debt service requirements, execution of our business strategy or other general corporate purposes on satisfactory terms or at all.
 
We may need to raise additional funding in the future to repay or refinance the Credit Agreement and MidCap Loan Agreement and our accounts payable, and as such may need to seek additional debt or equity financing. Such additional financing may not be available on favorable terms, if at all. If debt financing is available and obtained, our interest expense may increase and we may be subject to the risk of default, depending on the terms of such financing. If equity financing is available and obtained it may result in our shareholders experiencing significant dilution. If such financing is unavailable, we may be forced to curtail our operations, which may cause the value of our securities to decline in value and/or become worthless. Furthermore, the fact that our credit agreements have previously been declared in default may negatively affect the perception of the Company and our ability to pay our debts as they become due in the future and could result in the price of our securities declining in value or being valued at lower levels than companies with similar histories of defaults.
 
The covenants in our credit and loan agreements restrict our ability to operate our business and might lead to a default under our credit agreements.
 
Our debt agreements limit, among other things, our ability to:
 
incur or guarantee additional indebtedness;
create liens;
make payments to junior creditors;
make investments;
sell material assets
affect fundamental changes in our structure;
make certain acquisitions;
sell interests in our subsidiaries;
consolidate or merge with or into other companies or transfer all or substantially all of our assets; and
engage in transactions with affiliates.
 
The Credit Agreement also includes various covenants (positive and negative) binding the Company, including, requiring that the Company provide the Agent with certain reports, provide the Agent notice of material corporate events and forecasts, limiting the amount of indebtedness the Company may incur (for example, the Company’s total indebtedness could not exceed between $30,000,000-$32,000,000 at any time prior to our entry into the Second Amendment to the Credit Agreement on March 26, 2015 (the “Second Amendment”), and cannot exceed $7 million (including not more than $6 million under the MidCap Credit Agreement through December 31, 2015), subject to certain exemptions set forth in greater detail in the Credit Agreement), and requiring us to maintain certain financial ratios, relating to consolidated EBITDA (which for the purposes of the Credit Agreement, never take into account the results of operations of Vertex Refining OH, LLC (“Vertex OH”)) and debt leverage including maintaining a ratio of quarterly consolidated EBITDA (as calculated and adjusted in the Credit Agreement) to certain fixed charges (quarterly on a cumulative basis), for each applicable period of between 0.90:1.00 and 1.25:1.00 (depending on the applicable period); maintaining a ratio of consolidated debt to consolidated EBITDA (as calculated and adjusted in the Credit Agreement), for the applicable period (depending on the terms of the Credit Agreement such calculation is made for the prior 12 month period, the prior six month period or prior nine month period), for each quarter through maturity of between 4:00:1.00 and 2.5:1.00 (depending on the applicable period); maintaining consolidated EBITDA (as calculated and adjusted in the Credit Agreement), for each applicable period (as provided in the Credit Agreement), of between $4.25 million and $11.5 million between the original date of the Credit Agreement and December 31, 2014, and between $250,000 and $9.5 million thereafter through the maturity date of the Credit Agreement (depending on the applicable quarter); maintaining at all times liquid cash on hand and available borrowings under other applicable credit agreements of at least $3 million through the date of the Second Amendment and of at least $750,000 after the date of the Second Amendment prior to June 30, 2015, $1.5 million at any time after June 30, 2015 and prior to December 31, 2015, $2 million at any time after December 31, 2015 and prior to June 30, 2016, and $2.5 million at any time after June 30, 2016 and prior to December 31, 2016, and $3 million at any time after December 31, 2016; and requiring Vertex OH to maintain not less than $500,000 in cash at all times. The Credit Agreement also provides that the Company is not authorized to make any “earn-out

39



payment under the Heartland Purchase Agreement, if an event of default exists under the Credit Agreement or if such payment would create an event of default under the Credit Agreement. 

The MidCap Loan Agreement contains customary representations, warranties, covenants for facilities of similar nature and size as the MidCap Loan Agreement, and requirements for the Company to indemnify MidCap for certain losses. The Credit Agreement also includes various covenants (positive and negative), binding the Company and its subsidiaries, including not permitting the availability for loans under the MidCap Loan Agreement to ever be less than 10% of the credit limit ($700,000); prohibiting us from creating liens on any collateral pledged under the MidCap Loan Agreement, subject to certain exceptions; and prohibiting us from paying any dividends on capital stock, advancing any money to any person, guarantying any debt, creating any indebtedness, and entering into any transactions with affiliates on terms more favorable than those of an arms-length third party transaction.

As a result of these covenants and limitations, we may not be able to respond to changes in business and economic conditions and to obtain additional financing, if needed, and we may be prevented from engaging in transactions that might otherwise be beneficial to us. Our credit and loan agreements require, and our future credit facilities and loan agreements may require, us to maintain certain financial ratios and satisfy certain other financial condition tests. Our ability to meet these financial ratios and tests can be affected by events beyond our control, and we may not be able to meet those tests. The breach of any of these covenants could result in a default under our credit agreements or future credit facilities. Upon the occurrence of an event of default, the lenders could elect to declare all amounts outstanding under such credit agreements, including accrued interest or other obligations, to be immediately due and payable. If amounts outstanding under such credit agreements were to be accelerated, our assets might not be sufficient to repay in full that indebtedness and our other indebtedness.

Our credit agreements and loan agreements also contain cross-default and cross-acceleration provisions. Under these provisions, a default or acceleration under one instrument governing our debt may constitute a default under our other debt instruments that contain cross-default and cross-acceleration provisions, which could result in the related debt and the debt issued under such other instruments becoming immediately due and payable. In such event, we would need to raise funds from alternative sources, which funds might not be available to us on favorable terms, on a timely basis or at all. Alternatively, such a default could require us to sell assets and otherwise curtail operations to pay our creditors. The proceeds of such a sale of assets, or curtailment of operations, might not enable us to pay all of our liabilities.

We face significant penalties and damages in the event the registration statement we were required to file to register shares underlying the Series B Preferred Stock and Warrants sold in the Unit Offering is not declared effective within required time limits or such registration statement is subsequently suspended or terminated.

Under the Purchase Agreement, the Company has agreed to register the shares of common stock issuable upon conversion of the Series B Preferred Stock and upon exercise of the Warrants under the Securities Act, for resale by the Investors. The Company has committed to file a registration statement on Form S-1 by the 30th day following the closing of the Offering (July 24, 2015), and to cause the registration statement to become effective by the 90th day following the closing (September 22, 2015) (or, in the event of a “full review” by the Securities and Exchange Commission, the 120th day following the closing (October 22, 2015)). The Purchase Agreement provides for liquidated damages upon the occurrence of certain events, including, but not limited to, the failure by the Company to cause the registration statement to become effective by the deadlines set forth above. The amount of the liquidated damages is 1.0% of the aggregate subscription amount paid by an Investor for the Units affected by the event that are still held by the Investor upon the occurrence of the event, due on the date immediately following the event that caused such failure (or the 30th day following such event if the event relates to the suspension of the registration statement as described in the Purchase Agreement), and each 30 days thereafter, with such payments to be prorated on a daily basis during each 30 day period, subject to a maximum of an aggregate of 6% per year. If we fail to pay any liquidated damages in full within seven days after the date payable, we are required to pay interest thereon at a rate of 12% per annum until paid in full. In the event the registration statement is not declared effective within the required time limits set forth above, or such registration statement is subsequently suspended or terminated, or we otherwise fail to meet certain requirements set forth in the Purchase Agreement, we could be required to pay significant penalties which could adversely affect our cash flow and cause the value of our securities to decline in value.


40



RISKS RELATED TO OUR SECURITIES

Our Chief Executive Officer, Benjamin P. Cowart, has significant voting control over us, including the appointment of Directors and may have interests that differ from other shareholders. Mr. Cowart, as a significant shareholder, may, therefore, take actions that are not in the interest of other shareholders.

Benjamin P. Cowart, our Chairman, President and Chief Executive Officer, beneficially owns approximately 28.5% of our common stock (not including shares issuable upon exercise of options and warrants held by Mr. Cowart) and 22.8% of our total voting stock, and as such, Mr. Cowart exercises significant control in determining the outcome of corporate transactions or other matters, including the election of directors, mergers, consolidations, the sale of all or substantially all of our assets, and also the power to prevent or cause a change in control. The interests of Mr. Cowart may differ from the interests of the other stockholders and thus result in corporate decisions that are adverse to other shareholders. Should conflicts of interest arise, Mr. Cowart may not act in the best interests of our other shareholders and conflicts of interest may not be resolved in a manner favorable to our other shareholders.

We have established preferred stock which can be designated by the Board of Directors without shareholder approval and have established Series A Preferred Stock and Series B Preferred Stock, which gives the holders a liquidation preference and the ability to convert such shares into our common stock.

We have 50,000,000 shares of preferred stock authorized, which includes 5,000,000 shares of designated Series A Preferred Stock of which approximately 0.6 million shares are issued and outstanding as of the date of this report, and 10,000,000 designated shares of Series B Preferred Stock, of which 8,064,534 shares are issued and outstanding as of the date of this report. The Series A Preferred Stock has a liquidation preference of $1.49 per share. The Series B Preferred Stock has a liquidation preference of $3.10 per share, payable only after amounts owed to our senior creditor are satisfied. As a result, if we were to dissolve, liquidate or sell our assets, the holders of our Series A Preferred Stock would have the right to receive up to the first approximately $1 million in proceeds from any such transaction and holders of our Series B Preferred Stock would have the right to receive up to $25 million after the payment of amounts owed to certain other of our creditors, but before any amount is paid to the holders of our common stock. The payment of the liquidation preferences could result in common stock shareholders not receiving any consideration if we were to liquidate, dissolve or wind up, either voluntarily or involuntarily. Additionally, the existence of the liquidation preference may reduce the value of our common stock, make it harder for us to sell shares of common stock in offerings in the future, or prevent or delay a change of control. Furthermore, the conversion of Series A Preferred Stock and Series B Preferred Stock into common stock (each of which convert on a one-for-one basis (subject to adjustments for stock splits and recapitalizations)) may cause substantial dilution to our common shareholders. Additionally, because our Board of Directors is entitled to designate the powers and preferences of the preferred stock without a vote of our shareholders, subject to NASDAQ rules and regulations, our shareholders will have no control over what designations and preferences our future preferred stock, if any, will have.

In addition to the above, we are required to redeem any non-converted shares of Series B Preferred Stock, which remain outstanding on December 24, 2020, at the rate of $3.10 per share (or $25 million in aggregate as of the date of this filing), subject to the terms of our senior loan documents, which funds we may not have, or which may not be available on favorable terms, if at all.

There may be future sales of our common stock, which could adversely affect the market price of our common stock and dilute shareholders ownership of common stock.

The exercise of any options granted to executive officers and other employees under our equity compensation plans, and other issuances of our common stock could have an adverse effect on the market price of the shares of our common stock. We are not restricted from issuing additional shares of common stock, including any securities that are convertible into or exchangeable for, or that represent the right to receive shares of common stock, provided that we are subject to the requirements of the Nasdaq Capital Market (which generally require shareholder approval for any transactions which would result in the issuance of more than 20% of our then outstanding shares of common stock or voting rights representing over 20% of our then outstanding shares of stock) and are restricted for a period of six months from the effective date of the registration statement we are required to file pursuant to the Purchase Agreement from issuing securities, subject to certain exceptions, subject to the terms of the Purchase Agreement. Sales of a substantial number of shares of our common stock in the public market or the perception that such sales might occur could materially adversely affect the market price of the shares of our common stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Additionally, the sale of all or a significant portion of the shares of common stock, the resale of which is being registered pursuant to the registration statement required by the Purchase Agreement may cause the value of our common stock to decline in value.


41



The issuance and sale of common stock upon exercise of the Warrants may cause substantial dilution to existing stockholders and may also depress the market price of our common stock.

The Warrants have an exercise price of $2.92 per share. The Warrants are exercisable beginning 185 days after the date of the closing of the Offering and have a term of 5.5 years. The Warrants contain a cashless exercise provision in connection with any shares that are not then registered by the Company. Although the Warrants may not be exercised by the holders thereof if such exercise would cause such holder to own more than 9.999% of our outstanding common stock, this restriction does not prevent such holder from exercising some of the Warrants, selling those shares, and then exercising the rest of the Warrants, while still staying below the 9.999% limit. In this way, the holders of the Warrants could sell more than this limit while never actually holding more shares than this limit allows. If the holders of the Warrants choose to do this, it will cause substantial dilution to the then holders of our common stock.

If exercises of the Warrants and sales of such shares issuable upon exercise thereof take place, the price of our common stock may decline. In addition, the common stock issuable upon exercise of the Warrants may represent overhang that may also adversely affect the market price of our common stock. Overhang occurs when there is a greater supply of a company’s stock in the market than there is demand for that stock. When this happens the price of the company’s stock will decrease, and any additional shares which shareholders attempt to sell in the market will only further decrease the share price. If the share volume of our common stock cannot absorb shares sold by the Warrant holders, then the value of our common stock will likely decrease.

RISKS RELATED TO OUR SERIES B PREFERRED STOCK

The issuance of common stock upon conversion of the Series B Preferred Stock will cause immediate and substantial dilution to existing shareholders.

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

The issuance of common stock upon conversion of the Series B Preferred Stock will result in immediate and substantial dilution to the interests of other stockholders since the holders of the Series B Preferred Stock may ultimately receive and sell the full amount of shares issuable in connection with the conversion of such Series B Preferred Stock. Although the Series B Preferred Stock may not be converted by holder if such conversion would cause the holder to own more than 9.999% of our outstanding common stock, this restriction does not prevent such holder from converting some of its holdings, selling those shares, and then converting the rest of its holdings, while still staying below the 9.999% limit. In this way, the holders of the Series B Preferred Stock could sell more than this limit while never actually holding more shares than this limit allows. If the holders of the Series B Preferred Stock choose to do this, it will cause substantial dilution to the then holders of our common stock.

Our outstanding Series B Preferred Stock accrues a cash dividend.

Our Series B Preferred Stock accrues a dividend, payable quarterly in arrears (based on calendar quarters), in the amount of 6% per annum of the original issuance price of the Series B Preferred Stock ($3.10 per share or $25.0 million in aggregate). The dividend is payable by the Company, at the Company’s election, in registered common stock of the Company (if available) or cash, provided that any cash dividend payment is subject to us previously having repaid all amounts owed to our senior lender. In the event dividends are paid in registered common stock of the Company, the number of shares payable will be calculated by dividing (a) the accrued dividend by (b) 90% of the arithmetic average of the volume weighted average price (VWAP) of the Company’s common stock for the 10 trading days immediately prior to the applicable date of determination (the “Dividend Stock Payment Price”). Notwithstanding the foregoing, in no event may the Company pay dividends in common stock unless the applicable Dividend Stock Payment Price is above $2.91. If the Company is prohibited from paying the dividend in cash (due to contractual senior credit agreements or other restrictions) or is unable to pay the dividend in registered common stock, the dividend will be paid in-kind in Series B Preferred Stock shares at $3.10 per share.

We may not have sufficient available cash to pay the dividends as they accrue. The payment of the dividends, or our failure to timely pay the dividends when due, could reduce our available cash on hand, have a material adverse effect on our results of operations and cause the value of our stock to decline in value. Additionally, the issuance of shares of common stock or additional shares of Series B Preferred Stock in lieu of cash dividends (and the subsequent conversion of such Series B Preferred Stock into

42



common stock pursuant to the terms of such Series B Preferred Stock) could cause substantial dilution to the then holders of our common stock.

We may be required to issue additional shares of Series B Preferred Stock upon the occurrence of certain events.

As described above, in the event we do not have available cash to pay the dividends which accrue on the Series B Preferred Stock in cash, we are prohibited from paying such dividends in cash, and we do not have sufficient registered shares of common stock available to allow for the payment of such dividends in common stock, we are required to pay such dividends in-kind in Series B Preferred Stock shares at $3.10 per share, which will also include a $3.10 per share liquidation preference and the right to convert into common stock on a one-for-one basis.

The issuance and sale of common stock upon conversion of the Series B Preferred Stock may depress the market price of our common stock.

If conversions of the Series B Preferred Stock and sales of such converted shares take place, the price of our common stock may decline. In addition, the common stock issuable upon conversion of the Series B Preferred Stock may represent overhang that may also adversely affect the market price of our common stock. Overhang occurs when there is a greater supply of a company’s stock in the market than there is demand for that stock. When this happens the price of the company’s stock will decrease, and any additional shares which shareholders attempt to sell in the market will only further decrease the share price. If the share volume of our common stock cannot absorb converted shares sold by the Series B Preferred Stock holders, then the value of our common stock will likely decrease.

Any non-converted shares of Series B Preferred Stock are required to be redeemed by us on June 24, 2020. We are required to redeem any non-converted shares of Series B Preferred Stock, which remain outstanding on December 24, 2020, at the rate of $3.10 per share (or $25 million in aggregate as of the date of this filing), subject to the terms of our senior loan documents, which funds we may or may not have, or which may not be available on favorable terms, if at all.

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

As described above under “Part I” - “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” - “Recent Events” - “Churchill County, Nevada Lease”, we have the option of paying the rent due during fiscal 2016 under the Bango Lease and Equipment Leases in shares of our restricted common stock subject to the terms of such agreements as described above, and provided that the aggregate number of shares issuable is subject to the Share Cap described above. We claim an exemption from registration in connection with our entry into the Bango Lease and Equipment Leases and plan to claim an exemption from registration for the issuance of shares of common stock in connection with such Bango Lease and Equipment Leases, in the event we choose to pay rent by way of the issuance of shares of our restricted common stock, pursuant to Section 4(a)(2) and/or Rule 506 of Regulation D of the Securities Act of 1933, as amended (the “Securities Act”), since the foregoing did not and will not involve a public offering, the recipients are “accredited investors”, the recipients acquired and will acquire the securities for investment only and not with a view towards, or for resale in connection with, the public sale or distribution thereof, and the securities were offered without any general solicitation by us or our representatives.

On June 24, 2015, we closed the transactions contemplated by the June 19, 2015 Unit Purchase Agreement entered into with certain institutional Investors, pursuant to which we sold the Investors an aggregate of 8,064,534 Units, each consisting of (i) one share of Series B Preferred Stock and (ii) one warrant to purchase one-half of a share of common stock of the Company, at a price of $3.10 per Unit for an aggregate of $25.0 million.

The Units (including the shares of Series B Preferred Stock and the Warrants) were offered and sold to the Investors under the Purchase Agreement in transactions exempt from registration under the Securities Act, in reliance on Section 4(a)(2) thereof and Rule 506(b) of Regulation D of the Securities Act. Each of the Investors represented that it was an accredited investor within the meaning of Rule 501(a) of Regulation D, and acquired the Units for investment only and not with a view towards, or for resale in connection with, the public sale or distribution thereof. The Units were offered without any general solicitation by the Company or its representatives. The Units were not registered under the Securities Act and such securities may not be offered or sold in the United States absent registration or an exemption from registration under the Securities Act and any applicable state securities laws.

In the event of the complete conversion of the shares of Series B Preferred Stock (and not including the issuance of any shares of common stock or if applicable payment-in-kind shares of Series B Preferred Stock issued in connection with accrued dividends due under the terms of the Series B Preferred Stock) and disregarding any conversion limitations set forth in the Designation (or

43



otherwise agreed between the parties), a total of 8,064,534 shares of common stock would be issuable to the holders. In the event the Warrants were exercised in full and disregarding any conversion limitations set forth in the Warrants (or otherwise agreed between the parties), a total of 4,032,267 shares of common stock would be issuable to the holders.
    
Item 3.  Defaults Upon Senior Securities

None.
    
Item 4.  Mine Safety Disclosures

Not applicable.

Item 5.  Other Information.

Increases in Officer Salary

Effective on June 24, 2015, the Compensation Committee of the Board of Directors (the “Committee”) of the Company approved an increase in the yearly base salary of (a) Benjamin P. Cowart, our Chief Executive Officer and President to $425,000 (compared to $267,500 prior to such increase); and (b) Chris Carlson, our Chief Financial Officer and Secretary to $240,000 (compared to $195,000 prior to such increase)(collectively, the “Increases in Salary”).  The Committee also set the total yearly target bonuses of Mr. Cowart and Mr. Carlson at $385,000 and $240,000, respectively.  Notwithstanding the Increases in Salary, the Committee determined that such increases would not go into effect for at least 90 days because of our lack of liquidity, after which time the Committee will re-examine our liquidity position and determine whether such Increases in Salary will become effective (the “90 Day Compensation Re-Examination”).  

Employment Agreements

Effective on August 7, 2015, we entered into new employment agreements with Mr. Cowart and Mr. Carlson, which are described in greater detail below:

Benjamin P. Cowart, Chief Executive Officer and President

On August 7, 2015, we entered into an Executive Employment Agreement with Benjamin P. Cowart, our Chief Executive Officer and President (Mr. Cowart’s prior employment agreement had expired on April 16, 2014; provided that the parties had agreed to continue operating under the terms of the prior agreement until a new agreement was entered into). The agreement, which provides for Mr. Cowart to serve as our Chief Executive Officer, has a term extending through December 31, 2018, provided that the agreement automatically extends for additional one year terms thereafter in the event neither party provides the other at least 60 days prior notice of their intention not to renew the terms of the agreement.

Pursuant to the terms of the agreement, Mr. Cowart’s annual compensation package includes (1) a base salary of $425,000 per year ($267,500 per year subject to the terms of the 90 Day Compensation Re-Examination described above), subject to annual increases as determined in the sole discretion of the Compensation Committee, and (2) a bonus payment to be determined in the sole discretion of the Compensation Committee in an annual targeted amount of not less than $385,000, subject to the compliance by Mr. Cowart with performance goals that may be established by the Compensation Committee from time to time, provided no goals have been established to date, and that in the absence of performance goals, the amount of such bonus would be wholly determined in the discretion of the Compensation Committee. Mr. Cowart is also paid an automobile allowance of $750 per month during the term of the agreement and is eligible to participate in our stock option plan and other benefit plans.

The agreement prohibits Mr. Cowart from competing against us during the term of the agreement and for a period of twelve months after the termination of the agreement in any state and any other geographic area in which we or our subsidiaries provide Restricted Services or Restricted Products, directly or indirectly, during the twelve months preceding the date of the termination of the agreement. “Restricted Services” means the collection, trading, purchasing, processing, storing, aggregation, transportation, manufacture, distribution, recycling, storage, refinement, re-refinement and sale of Restricted Products, dismantling, demolition, decommission and marine salvage services and any other services that we or our subsidiaries have provided or are researching, developing, performing and/or providing at any time during the two years immediately preceding the date of termination, or which Mr. Cowart has obtained any trade secret or other confidential information about at any time during the two years immediately preceding the date of termination of the agreement. “Restricted Products” means used motor oil, petroleum by-products, vacuum gas oil, aggregated feedstock and re-refined oil products, gasoline blendstock, pygas and fuel oil cutterstock, oil filters, engine coolant and/or other hydrocarbons and any other product, that we or our subsidiaries have provided or are researching, developing,

44



manufacturing, distributing, refining, re-refining, aggregating, purchasing, selling and/or providing at any time during the two years immediately preceding the date the agreement is terminated, or which Mr. Cowart obtained any trade secret or other confidential information in connection with at any time during the two years immediately preceding the date of termination of the agreement.

We may terminate Mr. Cowart’s employment (a) for “cause” (which is defined to include, a material breach of the agreement by Mr. Cowart, any act of misappropriation of funds or embezzlement by Mr. Cowart, Mr. Cowart committing any act of fraud, or Mr. Cowart being indicted of, or pleading guilty or nolo contendere with respect to, theft, fraud, a crime involving moral turpitude, or a felony under federal or applicable state law); (b) in the event Mr. Cowart suffers a physical or mental disability which renders him unable to perform his duties and obligations for either 90 consecutive days or 180 days in any 12-month period; (c) for any reason without “cause”; or (d) upon expiration of the initial term of the agreement (or any renewal) upon notice as provided above. The agreement also automatically terminates upon the death of Mr. Cowart.

Mr. Cowart may terminate his employment (a) for “good reason” (i.e., (a) if his position or duties are modified to such an extent that his duties are no longer consistent with the position of CEO of the Company, (b) there has been a material breach by us of a material term of the agreement or Mr. Cowart reasonably believes that we are violating any law which would have a material adverse effect on our operations and such violation continues uncured thirty days after such breach and after notice thereof has been provided to us by Mr. Cowart, or (c) Mr. Cowart’s compensation is reduced without his consent, or we fail to pay to Mr. Cowart any compensation due to him upon five days written notice from Mr. Cowart informing us of such failure); provided, however, prior to any such termination by Mr. Cowart for “good reason”, Mr. Cowart must first advise us in writing (within 15 days of the occurrence of such event) and provide us 15 days to cure (5 days in connection with the reduction of Mr. Cowart’s salary or the failure to pay amounts owed to him)); (b) for any reason without “good reason”; and (c) upon expiration of the initial term of the agreement (or any renewal) upon notice as provided above.

In the event that Mr. Cowart’s employment is terminated for any reason (not including, however, a termination by us for “cause” or a termination as a result of Mr. Cowart’s death or disability) during the twelve month period following a Change of Control (a “Change of Control Termination”) or in anticipation of a Change of Control, we are required to pay Mr. Cowart, within 60 days following the later of (i) the date of such Change of Control Termination; and (ii) the date of such Change of Control, a cash severance payment in a lump sum in an amount equal to 3.0 times the sum of his current base salary and the amount of the last bonus payable to Mr. Cowart (the “Change of Control Payment”), which amount is due within 60 days of the later of (i) the date of such Change of Control Termination; and (ii) the date of such Change of Control. If Mr. Cowart’s employment terminates due to a Change of Control Termination within six (6) months prior to a Change of Control, it will be deemed to be “in anticipation of a Change of Control” for all purposes. In addition, in the event of a Change of Control, all of Mr. Cowart’s equity-based compensation immediately vests to Mr. Cowart and any outstanding stock options held by Mr. Cowart can be exercised by Mr. Cowart until the earlier of (A) one (1) year from the date of termination and (B) the latest date upon which such stock options would have expired by their original terms under any circumstances, provided that if Mr. Cowart’s employment ends in anticipation of a Change of Control and such equity-based compensation awards or stock options have previously expired pursuant to their terms, the Company is required to pay Mr. Cowart a lump sum payment, payable on the same date as the Change of Control Payment, equal to the black scholes value of the expired and unexercised equity compensation awards and stock options held by Mr. Cowart on the date of termination, based on the value of such awards had they been exercisable through the end of their stated term and had not previously expired. “Change of Control” for the purposes of the agreement means: (a) any person obtaining beneficial ownership representing more than 50% of the total voting power represented by our then outstanding voting securities without the approval of not fewer than two-thirds of our Board of Directors; (b) a merger or consolidation of us whether or not approved by our Board of Directors, other than a merger or consolidation that would result in our voting securities immediately prior thereto continuing to represent at least 50% of the total voting power outstanding immediately after such merger or consolidation, (c) our shareholders approving a plan of complete liquidation or an agreement for the sale or disposition by us of all or substantially all of our assets, or (d) as a result of the election of members to our Board of Directors, a majority of the Board of Directors consists of persons who are not members of the Board of Directors on August 7, 2015, except in the event that such slate of directors is proposed by a committee of the Board of Directors; provided that if the definition of “Change of Control” in our Stock Incentive Plans or Equity Compensation Plans is more favorable than the definition above, then such definition shall be controlling.

If Mr. Cowart’s employment is terminated pursuant to his death, disability, the end of the initial term (or any renewal term), without “good reason” by Mr. Cowart, or by us for “cause”, Mr. Cowart is entitled to all salary accrued through the termination date and no other benefits other than as required under the terms of employee benefit plans in which Mr. Cowart was participating as of the termination date. Additionally, any unvested stock options or equity compensation held by Mr. Cowart immediately terminate and are forfeited (unless otherwise provided in the applicable award) and any previously vested stock options (or if applicable equity compensation) are subject to the terms and conditions set forth in the applicable Stock Incentive Plan or Equity Compensation Plan, or award agreement, as such may describe the rights and obligations upon termination of employment of Mr. Cowart.

45




If Mr. Cowart’s employment is terminated by Mr. Cowart for “good reason”, or by us without “cause”, (a) Mr. Cowart is entitled to continue to receive the salary due pursuant to the terms of the agreement at the rate in effect upon the termination date for twelve (12) months or otherwise until such obligation ceases. Additionally, unvested benefits (whether equity or cash benefits and bonuses) will vest immediately upon such termination and any outstanding stock options previously granted to Mr. Cowart will vest immediately upon such termination and will be exercisable until the earlier of (A) one year from the date of termination and (B) the latest date upon which such stock options would have expired by their original terms under any circumstances.

The agreement contains standard assignment of inventions, indemnification and confidentiality provisions. Further, Mr. Cowart is subject to non-solicitation covenants during the term of the agreement.

Although Mr. Cowart will be prohibited from competing with us while he is employed with us, he will only be prohibited from competing for twelve months after his employment with us ends pursuant to the agreement, provided that Mr. Cowart is also prohibited from competing against us in connection with certain of our operations until August 17, 2017, pursuant to a prior Non-Competition and Non-Solicitation Agreement entered into with Mr. Cowart.

Chris Carlson, Chief Financial Officer and Secretary

On August 7, 2015, we entered into an Executive Employment Agreement with Chris Carlson, our Chief Financial Officer and Secretary (Mr. Carlson’s prior employment agreement had expired on April 1, 2015; provided that the parties had agreed to continue operating under the terms of the prior agreement until a new agreement was entered into). The agreement, which provides for Mr. Carlson to serve as our Chief Financial Officer, has a term extending through December 31, 2018, provided that the agreement automatically extends for additional one year terms thereafter in the event neither party provides the other at least 60 days prior notice of their intention not to renew the terms of the agreement.

Pursuant to the terms of the agreement, Mr. Carlson’s annual compensation package includes (1) a base salary of $240,000 per year ($195,000 per year subject to the terms of the 90 Day Compensation Re-Examination described above), subject to annual increases as determined in the sole discretion of the Compensation Committee, and (2) a bonus payment to be determined in the sole discretion of the Compensation Committee in an annual targeted amount of not less than $240,000, subject to the compliance by Mr. Carlson with performance goals that may be established by the Compensation Committee from time to time, provided no goals have been established to date, and that in the absence of performance goals, the amount of such bonus would be wholly determined in the discretion of the Compensation Committee. Mr. Carlson is also paid an automobile allowance of $750 per month during the term of the agreement and is eligible to participate in our stock option plan and other benefit plans.

The agreement prohibits Mr. Carlson from competing against us during the term of the agreement and for a period of twelve months after the termination of the agreement in any state and any other geographic area in which we or our subsidiaries provide Restricted Services or Restricted Products, directly or indirectly, during the twelve months preceding the date of the termination of the agreement. “Restricted Services” means the collection, trading, purchasing, processing, storing, aggregation, transportation, manufacture, distribution, recycling, storage, refinement, re-refinement and sale of Restricted Products, dismantling, demolition, decommission and marine salvage services and any other services that we or our subsidiaries have provided or are researching, developing, performing and/or providing at any time during the two years immediately preceding the date of termination, or which Mr. Carlson has obtained any trade secret or other confidential information about at any time during the two years immediately preceding the date of termination of the agreement. “Restricted Products” means used motor oil, petroleum by-products, vacuum gas oil, aggregated feedstock and re-refined oil products, gasoline blendstock, pygas and fuel oil cutterstock, oil filters, engine coolant and/or other hydrocarbons and any other product, that we or our subsidiaries have provided or are researching, developing, manufacturing, distributing, refining, re-refining, aggregating, purchasing, selling and/or providing at any time during the two years immediately preceding the date the agreement is terminated, or which Mr. Carlson obtained any trade secret or other confidential information in connection with at any time during the two years immediately preceding the date of termination of the agreement.

We may terminate Mr. Carlson’s employment (a) for “cause” (which is defined to include, a material breach of the agreement by Mr. Carlson, any act of misappropriation of funds or embezzlement by Mr. Carlson, Mr. Carlson committing any act of fraud, or Mr. Carlson being indicted of, or pleading guilty or nolo contendere with respect to, theft, fraud, a crime involving moral turpitude, or a felony under federal or applicable state law); (b) in the event Mr. Carlson suffers a physical or mental disability which renders him unable to perform his duties and obligations for either 90 consecutive days or 180 days in any 12-month period; (c) for any reason without “cause”; or (d) upon expiration of the initial term of the agreement (or any renewal) upon notice as provided above. The agreement also automatically terminates upon the death of Mr. Carlson.


46



Mr. Carlson may terminate his employment (a) for “good reason” (i.e., (a) if his position or duties are modified to such an extent that his duties are no longer consistent with the position of CFO of the Company, (b) there has been a material breach by us of a material term of the agreement or Mr. Carlson reasonably believes that we are violating any law which would have a material adverse effect on our operations and such violation continues uncured thirty days after such breach and after notice thereof has been provided to us by Mr. Carlson, or (c) Mr. Carlson’s compensation is reduced without his consent, or we fail to pay to Mr. Carlson any compensation due to him upon five days written notice from Mr. Carlson informing us of such failure); provided, however, prior to any such termination by Mr. Carlson for “good reason”, Mr. Carlson must first advise us in writing (within 15 days of the occurrence of such event) and provide us 15 days to cure (5 days in connection with the reduction of Mr. Carlson’s salary or the failure to pay amounts owed to him)); (b) for any reason without “good reason”; and (c) upon expiration of the initial term of the agreement (or any renewal) upon notice as provided above.

In the event that Mr. Carlson’s employment is terminated for any reason (not including, however, a termination by us for “cause” or a termination as a result of Mr. Carlson’s death or disability) during the twelve month period following a Change of Control (a “Change of Control Termination”) or in anticipation of a Change of Control, we are required to pay Mr. Carlson, within 60 days following the later of (i) the date of such Change of Control Termination; and (ii) the date of such Change of Control, a cash severance payment in a lump sum in an amount equal to 3.0 times the sum of his current base salary and the amount of the last bonus payable to Mr. Carlson (the “Change of Control Payment”), which amount is due within 60 days of the later of (i) the date of such Change of Control Termination; and (ii) the date of such Change of Control. If Mr. Carlson’s employment terminates due to a Change of Control Termination within six (6) months prior to a Change of Control, it will be deemed to be “in anticipation of a Change of Control” for all purposes. In addition, in the event of a Change of Control, all of Mr. Carlson’s equity-based compensation immediately vests to Mr. Carlson and any outstanding stock options held by Mr. Carlson can be exercised by Mr. Carlson until the earlier of (A) one (1) year from the date of termination and (B) the latest date upon which such stock options would have expired by their original terms under any circumstances, provided that if Mr. Carlson’s employment ends in anticipation of a Change of Control and such equity-based compensation awards or stock options have previously expired pursuant to their terms, the Company is required to pay Mr. Carlson a lump sum payment, payable on the same date as the Change of Control Payment, equal to the black scholes value of the expired and unexercised equity compensation awards and stock options held by Mr. Carlson on the date of termination, based on the value of such awards had they been exercisable through the end of their stated term and had not previously expired. “Change of Control” for the purposes of the agreement means: (a) any person obtaining beneficial ownership representing more than 50% of the total voting power represented by our then outstanding voting securities without the approval of not fewer than two-thirds of our Board of Directors; (b) a merger or consolidation of us whether or not approved by our Board of Directors, other than a merger or consolidation that would result in our voting securities immediately prior thereto continuing to represent at least 50% of the total voting power outstanding immediately after such merger or consolidation, (c) our shareholders approving a plan of complete liquidation or an agreement for the sale or disposition by us of all or substantially all of our assets, or (d) as a result of the election of members to our Board of Directors, a majority of the Board of Directors consists of persons who are not members of the Board of Directors on August 7, 2015, except in the event that such slate of directors is proposed by a committee of the Board of Directors; provided that if the definition of “Change of Control” in our Stock Incentive Plans or Equity Compensation Plans is more favorable than the definition above, then such definition shall be controlling.

If Mr. Carlson’s employment is terminated pursuant to his death, disability, the end of the initial term (or any renewal term), without “good reason” by Mr. Carlson, or by us for “cause”, Mr. Carlson is entitled to all salary accrued through the termination date and no other benefits other than as required under the terms of employee benefit plans in which Mr. Carlson was participating as of the termination date. Additionally, any unvested stock options or equity compensation held by Mr. Carlson immediately terminate and are forfeited (unless otherwise provided in the applicable award) and any previously vested stock options (or if applicable equity compensation) are subject to the terms and conditions set forth in the applicable Stock Incentive Plan or Equity Compensation Plan, or award agreement, as such may describe the rights and obligations upon termination of employment of Mr. Carlson.

If Mr. Carlson’s employment is terminated by Mr. Carlson for “good reason”, or by us without “cause”, (a) Mr. Carlson is entitled to continue to receive the salary due pursuant to the terms of the agreement at the rate in effect upon the termination date for twelve (12) months following the termination date, payable in accordance with our normal payroll practices and policies; (b) Mr. Carlson is entitled to the pro rata amount of any cash bonus which would be payable to Mr. Carlson had he remained employed for an additional twelve months following the termination date; and (c) provided Mr. Carlson elects to receive continued health insurance coverage through COBRA, we are required to pay Mr. Carlson’s monthly COBRA contributions for health insurance coverage, as may be amended from time to time (less an amount equal to the premium contribution paid by active Company employees, if any) for twelve months following the termination date; provided, however, that if at any time Mr. Carlson is covered by a substantially similar level of health insurance through subsequent employment or otherwise such obligation ceases. Additionally, unvested benefits (whether equity or cash benefits and bonuses) will vest immediately upon such termination and any outstanding stock options previously granted to Mr. Carlson will vest immediately upon such termination and will be exercisable until the

47



earlier of (A) one year from the date of termination and (B) the latest date upon which such stock options would have expired by their original terms under any circumstances.

The agreement contains standard assignment of inventions, indemnification and confidentiality provisions. Further, Mr. Carlson is subject to non-solicitation covenants during the term of the agreement.

Although Mr. Carlson will be prohibited from competing with us while he is employed with us, he will only be prohibited from competing for twelve months after his employment with us ends pursuant to the agreement, provided that Mr. Carlson is also prohibited from competing against us in connection with certain of our operations until August 17, 2017, pursuant to a prior Non-Competition and Non-Solicitation Agreement entered into with Mr. Carlson.

Aaron Oil Acquisition

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

Item 6.  Exhibits
 
See the Exhibit Index following the signature page to this Quarterly Report on Form 10-Q for a list of exhibits filed or furnished with this report, which Exhibit Index is incorporated herein by reference. 

48



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 10, 2015
By: /s/ Benjamin P. Cowart
 
Benjamin P. Cowart
 
Chief Executive Officer
 
(Principal Executive Officer)
 
 
 
 
Date: August 10, 2015
By: /s/ Chris Carlson
 
Chris Carlson
 
Chief Financial Officer
 
(Principal Financial Officer)


49



EXHIBIT INDEX
 
 
 
 
 
 
 
Incorporated by Reference
Exhibit Number
 
Description of Exhibit
 
Filed or Furnished Herewith
 
Form
 
Exhibit
 
Filing Date/Period End Date
 
File No.
1.1
 
Underwriting Agreement, dated November 20, 2013, by and among Vertex Energy, Inc. and Craig-Hallum Capital Group LLC
 
 
 
8-K
 
1.1

 
11/21/2013
 
001-11476
2.1
 
Unit Purchase Agreement by and among Vertex Energy, Inc., Vertex Acquisition Sub, LLC, Vertex Holdings, L.P. and B&S Cowart Family L.P. dated as of August 14, 2012
 
 
 
8-K
 
2.1

 
8/15/2012
 
000-53619
2.2
 
First Amendment to Unit Purchase Agreement by and among Vertex Energy, Inc., Vertex Acquisition Sub, LLC, Vertex Holdings, L.P. and B&S Cowart Family L.P. dated as of September 11, 2012
 
 
 
8-K
 
2.2

 
9/12/2012
 
000-53619
2.3
 
Asset Purchase Agreement by and among Vertex Energy, Inc., Vertex Refining LA, LLC.,Vertex Refining NV., LLC, Omega Refining, LLC, Bango Refining NV, LLC and Omega Holdings Company LLC (March 17, 2014)
 
 
 
8-K
 
2.1

 
3/19/2014
 
001-11476
2.4
 
Second Amendment to Asset Purchase Agreement by and among Vertex Energy, Inc., Vertex Refining LA, LLC, Vertex Refining NV, LLC, Bango Refining NV, LLC and Omega Holdings Company LLC (April 30, 2014)
 
 
 
8-K
 
2.3

 
5/6/2014
 
001-11476
2.5(#)
 
Third Amendment to Asset Purchase Agreement by and among Vertex Energy, Inc., Vertex Refining LA, LLC, Vertex Refining NV, LLC, Bango Refining NV, LLC and Omega Holdings Company LLC (May 2, 2014)
 
 
 
8-K
 
2.4

 
5/6/2014
 
001-11476
2.6
 
Fourth Amendment to Asset Purchase Agreement by and among Vertex Energy, Inc., Vertex Refining LA, LLC, Vertex Refining NV, LLC, Louisiana LV OR LLC, formerly known as Omega Refining, LLC, Bango Refining NV, LLC and Omega Holdings Company LLC (January 19, 2015)

 
 
 
8-K
 
2.1

 
1/21/2015
 
001-11476
2.7
 
Asset Purchase Agreement by and among Vertex Energy Operating, LLC, Vertex Refining OH, LLC, Vertex Energy Inc. and Heartland Group Holdings, LLC (October 21, 2014)
 
 
 
8-K
 
2.1

 
10/28/2014
 
001-11476
2.8
 
First Amendment to Asset Purchase Agreement by and among Vertex Energy Operating, LLC, Vertex Refining OH, LLC, Vertex Energy, Inc. and Heartland Group Holdings, LLC (November 26, 2014)
 
 
 
8-K
 
2.2

 
12/1/2014
 
001-11476

50



2.9
 
Second Amendment to Asset Purchase Agreement by and among Vertex Energy Operating, LLC, Vertex Refining OH, LLC, Vertex Energy, Inc. and Heartland Group Holdings, LLC (December 5, 2014)
 
 
 
8-K
 
2.3

 
12/9/2014
 
001-11476
2.10
 
Third Amendment to Asset Purchase Agreement by and among Vertex Energy Operating, LLC, Vertex Refining OH, LLC, Vertex Energy, Inc. and Heartland Group Holdings, LLC (March 4, 2015)
 
 
 
8-K
 
2.4

 
3/6/2015
 
001-11476
3.1
 
Articles of Incorporation (and amendments thereto) of Vertex Energy, Inc.
 
 
 
8-K/A
 
3.1

 
6/26/2009
 
000-53619
3.2
 
Amended and Restated Certificate of Designation of Rights, Preferences and Privileges of Vertex Energy, Inc.'s Series A Convertible Preferred Stock.
 
 
 
8-K
 
3.1

 
7/16/2010
 
000-53619
3.3
 
Amended and Restated Certificate of Designation of Vertex Energy, Inc. Establishing the Designation, Preferences, Limitations and Relative Rights of Its Series B Preferred Stock (as filed with the Secretary of State of Nevada on June 23, 2015)
 
 
 
8-K
 
3.1

 
6/24/2014
 
001-11476
3.4
 
Amended and Restated Bylaws of Vertex Energy, Inc.
 
 
 
8-K
 
3.1

 
1/15/2014
 
001-11476
10.1
 
Employment Agreement with Benjamin P. Cowart effective April 16, 2009 ***
 
 
 
8-K/A
 
10.5

 
6/26/2009
 
000-53619
10.2
 
Employment Agreement with Matthew Lieb effective April 16, 2009 ***
 
 
 
8-K/A
 
10.7

 
6/26/2009
 
000-53619
10.3
 
Loan Agreement with Bank of America dated September 16, 2010
 
 
 
8-K
 
10.1

 
9/24/2010
 
000-53619
10.4
 
Security Agreement with Bank of America dated September 16, 2010
 
 
 
8-K
 
10.2

 
9/24/2010
 
000-53619
10.5(+)
 
Tolling Agreement between KMTEX, Ltd. and Vertex Energy Inc., dated April 17, 2013
 
 
 
8-K
 
10.1

 
11/12/2013
 
001-11476
10.6
 
Amended and Restated Employment Agreement with Chris Carlson dated March 29, 2011 and effective April 1, 2010***
 
 
 
10-K
 
10.18

 
12/31/2010
 
000-53619
10.7
 
First Amendment to Employment Agreement with Benjamin P. Cowart dated March 25, 2011 and effective as of December 15, 2010***
 
 
 
10-K
 
10.19

 
12/31/2010
 
000-53619
10.8
 
First Amendment to Employment Agreement with Matt Lieb dated February 1, 2011 and effective March 28, 2011***
 
 
 
10-K
 
10.20

 
12/31/2010
 
000-53619
10.9
 
Addendum to Employment Agreement Between Vertex Energy, Inc. and Greg Wallace dated July 5, 2011***
 
 
 
10-Q
 
10.21

 
9/30/2011
 
000-53619
10.10
 
Second Addendum to Employment Agreement Between Vertex Energy, Inc. and Greg Wallace dated June 15, 2012***
 
 
 
10-Q
 
10.11

 
9/30/2012
 
000-53619
10.11
 
Employment Agreement with John Strickland - July 2012**
 
 
 
10-Q
 
10.12

 
9/30/2012
 
000-53619

51



10.12
 
Credit Agreement between Vertex Energy, Inc. and Bank of America, N.A. dated August 31, 2012
 
 
 
8-K
 
10.1

 
9/12/2012
 
000-53619
10.13
 
$10,000,000 Revolving Note by Vertex Energy, Inc. in favor of Bank of America, N.A. dated August 31, 2012
 
 
 
8-K
 
10.2

 
9/12/2012
 
000-53619
10.14
 
$8,500,000 Term Note by Vertex Energy, Inc. in favor of Bank of America, N.A. dated August 31, 2012
 
 
 
8-K
 
10.3

 
9/12/2012
 
000-53619
10.15
 
Security Agreement with Bank of America, N.A. dated August 31, 2012
 
 
 
8-K
 
10.4

 
9/12/2012
 
000-53619
10.16
 
Corporate Guaranty in favor of Bank of America, N.A. dated August 31, 2012
 
 
 
8-K
 
10.5

 
9/12/2012
 
000-53619
10.17
 
First Amendment to Credit Agreement between Vertex Energy, Inc. and Bank of America, N.A. dated August 31, 2012
 
 
 
10-Q
 
10.18

 
9/30/2012
 
000-53619
10.18
 
Non-Competition and Non-Solicitation Agreement by Vertex Holdings, L.P., B & S Cowart Family L.P., Benjamin P. Cowart, Chris Carlson and Greg Wallace in favor of Vertex Energy, Inc., dated August 31, 2012***
 
 
 
10-Q
 
10.19

 
9/30/2012
 
000-53619
10.19
 
Second Addendum to Employment Agreement with Benjamin P. Cowart, dated August 31, 2012***
 
 
 
10-Q
 
10.20

 
9/30/2012
 
000-53619
10.20
 
First Addendum to Amended and Restated Employment Agreement with Chris Carlson, dated August 31, 2012***
 
 
 
10-Q
 
10.21

 
9/30/2012
 
000-53619
10.21
 
2004 Stock Option Plan - World Waste Technologies, Inc.***
 
 
 
10-KSB
 
10.3

 
12/31/2004
 
001-11476
10.22
 
Form of Stock Option Agreement, pursuant to 2004 Stock Option Plan***
 
 
 
10-KSB
 
10.4

 
12/31/2004
 
001-11476
10.23
 
2007 Stock Plan - World Waste Technologies, Inc.***
 
 
 
8-K
 
10.2

 
5/21/2007
 
001-11476
10.24
 
Form of Stock Option Agreement, pursuant to 2007 Stock Option Plan***
 
 
 
8-K
 
10.3

 
5/21/2007
 
001-11476
10.25
 
Vertex Energy, Inc., 2008 Stock Incentive Plan***
 
 
 
8-K/A
 
4.1

 
6/26/2009
 
000-53619
10.26
 
2008 Stock Incentive Plan - Form of Stock Option Agreement***
 
 
 
10-K
 
10.27

 
12/31/2012
 
001-11476
10.27
 
Vertex Energy, Inc., 2009 Stock Incentive Plan***
 
 
 
8-K
 
4.1

 
7/31/2009
 
000-53619
10.28
 
2009 Stock Incentive Plan - Form of Stock Option Agreement***
 
 
 
10-K
 
10.29

 
12/31/2012
 
001-11476
10.29
 
Waiver and Second Amendment to Credit Agreement with Bank of America, N.A. (January 2013)
 
 
 
10-K
 
10.30

 
12/31/2012
 
001-11476
10.30
 
Vertex Energy, Inc. 2013 Stock Incentive Plan***
 
 
 
S-8
 
4.1

 
7/28/2014
 
333-197659
10.31
 
Vertex Energy, Inc.-Form of 2013 Stock Incentive Plan Stock Option Award***
 
 
 
8-K
 
10.1

 
9/30/2013
 
001-11476
10.32
 
Vertex Energy, Inc.-Form of 2013 Stock Incentive Plan Restricted Stock Grant Agreement***
 
 
 
S-8
 
4.3

 
7/28/2014
 
333-197659

52



10.33(+)
 
Secured Promissory Note ($13,858,066.67)-May 2, 2014-Omega Refining, LLC and Bango Refining NV, LLC as borrowers and Vertex Refining NV, LLC as lender
 
 
 
8-K
 
10.1

 
5/6/2014
 
001-11476
10.34
 
Guaranty Agreement-Omega Holdings-May 2, 2014
 
 
 
8-K
 
10.2

 
5/6/2014
 
001-11476
10.35(+)
 
Credit and Guaranty Agreement dated as of May 2, 2014, by and among Vertex Energy Operating, LLC, Vertex Energy, Inc., and certain other subsidiaries of Vertex Energy, Inc., as Guarantors, and Goldman Sachs USA, as Lender and as Administrative Agent, Collateral Agent, and Lead Arranger
 
 
 
8-K
 
10.3

 
5/6/2014
 
001-11476
10.36
 
Term Loan Note ($40,000,000)-Credit and Guaranty Agreement dated as of May 2, 2014
 
 
 
8-K
 
10.4

 
5/6/2014
 
001-11476
10.37(+)
 
Pledge and Security Agreement-Credit and Guaranty Agreement dated as of May 2, 2014
 
 
 
8-K
 
10.5

 
5/6/2014
 
001-11476
10.38(+)
 
Amended and Restated Credit Agreement, among Vertex Energy, Inc., and Vertex Energy Operating, LLC, as Borrowers and Bank of America, N.A., as Lender as of May 2, 2014
 
 
 
8-K
 
10.6

 
5/6/2014
 
001-11476
10.39
 
Revolving Note ($20,000,000)-Amended and Restated Credit Agreement, as of May 2, 2014
 
 
 
8-K
 
10.7

 
5/6/2014
 
001-11476
10.40(+)
 
Pledge and Security Agreement-Amended and Restated Credit Agreement, as of May 2, 2014
 
 
 
8-K
 
10.8

 
5/6/2014
 
001-11476
10.41
 
Amended and Restated Guaranty-Amended and Restated Credit Agreement, as of May 2, 2014
 
 
 
8-K
 
10.9

 
5/6/2014
 
001-11476
10.42
 
Intercreditor Agreement, May 2, 2014, by and among Bank of America, N.A. and Goldman Sachs Bank USA
 
 
 
8-K
 
10.10

 
5/6/2014
 
001-11476
10.43
 
At-Will Employment, Confidential Information, Invention Assignment and Arbitration Agreement with David Peel (April 2014)***
 
 
 
8-K
 
10.1

 
6/24/2014
 
001-11476
10.44
 
Retention and Noncompetition Agreement with David Peel (April 2014)***
 
 
 
8-K
 
10.2

 
6/24/2014
 
001-11476
10.45
 
Employment Agreement between Vertex Refining LA, LLC and James P. Gregory (Effective May 2, 2014)***
 
 
 
8-K
 
10.1

 
7/29/2014
 
001-11476
10.46
 
Form of Common Stock Purchase Agreement dated June 5, 2014 by and between Vertex Energy, Inc. and the purchasers named therein
 
 
 
8-K
 
10.1

 
6/6/2014
 
001-11476
10.47
 
Land Lease between Marrero Terminal LLC, as Landlord and Omega Refining, LLC, as Tenant, relating to the Used Motor Oil Re-Refinery Located at 5000 River Road, Marrero, Louisiana 70094, dated as of April 30, 2008 and amendments
 
 
 
10-Q
 
10.22

 
6/30/2014
 
001-11476

53



10.48
 
Commercial Lease between Plaquemines Holdings, LLC as Landlord and Omega Refining, LLC, as Tenant, relating to the Myrtle Grove Facility Located at 278 East Ravenna Road, Myrtle Grove, LA, dated as of May 25, 2012 and amendments
 
 
 
10-Q
 
10.23

 
6/30/2014
 
001-11476
10.49
 
Operation and Maintenance Agreement dated as of November 3, 2010, by and between Magellan Terminals Holdings, L.P. (f/k/a Marrero Terminal, LLC) and Omega Refining, LLC
 
 
 
10-Q
 
10.24

 
6/30/2014
 
001-11476
10.50(#)
 
Terminaling Services Agreement between Marrero Terminal LLC (Owner) and Omega Refining, LLC (Customer) dated as of May 1, 2008
 
 
 
10-Q
 
10.25

 
6/30/2014
 
001-11476
10.51(#)
 
Second Use Motor Oil Buy/Sell Contract dated August 1, 2012, by and between Thermo Fluids, Inc. and Omega Refining, LLC
 
 
 
10-Q
 
10.26

 
6/30/2014
 
001-11476
10.52
 
Consulting Agreement, Timothy C. Harvey (October 3, 2014)***
 
 
 
8-K
 
10.1

 
10/9/2014
 
001-11476
10.53
 
Consulting Agreement between Heartland Group Holdings, LLC and Vertex Energy Operating, LLC (July 28, 2014)
 
 
 
8-K
 
10.1

 
10/28/2014
 
001-11476
10.54
 
Common Stock Purchase Warrant to purchase 109,934 shares of common stock of the Company held by The Benjamin Paul Cowart 2012 Grantor Retained Trust (December 4, 2014)
 
 
 
8-K
 
4.1

 
12/9/2014
 
001-11476
10.55
 
Common Stock Purchase Warrant to purchase 109,934 shares of common stock of the Company held by The Shelley T. Cowart 2012 Grantor Retained Trust (December 4, 2014)
 
 
 
8-K
 
4.2

 
12/9/2014
 
001-11476
10.56
 
Form of Subscription Agreement dated December 4, 2014
 
 
 
8-K
 
10.2

 
12/9/2014
 
001-11476
10.57
 
First Amendment to Credit and Guaranty Agreement between Vertex Energy Operating, LLC, Vertex Energy, Inc. and Goldman Sachs Bank USA (December 5, 2014)
 
 
 
8-K
 
10.3

 
12/9/2014
 
001-11476
10.58
 
First Amendment to Amended and Restated Credit Agreement between Vertex Energy Operating, LLC, Vertex Energy, Inc. and Bank of America, N.A. (December 5, 2014)
 
 
 
8-K
 
10.4

 
12/9/2014
 
001-11476
10.59
 
First Amendment to Secured Promissory Note dated January 7, 2015 - Omega Refining, LLC and Bango Refining NV, LLC as borrowers and Vertex Refining NV, LLC as lender
 
 
 
8-K
 
10.2

 
1/15/2015
 
001-11476
10.60
 
Second Amendment to Credit and Guaranty Agreement dated March 26, 2015, by and between Vertex Energy Operating, LLC, Vertex Energy, Inc., certain of the Company's subsidiaries, Goldman Sachs Specialty Lending Holdings, Inc. ("Lender") and Goldman Sachs Bank USA. as Administrative Agent and Collateral Agent for Lender
 
 
 
8-K
 
10.1

 
3/31/2015
 
001-11476

54



10.61
 
Common Stock Purchase Warrant to purchase 1,766,874 shares of common stock dated March 26, 2015, by Vertex Energy, Inc., in favor of Goldman, Sachs & Co.
 
 
 
8-K
 
10.2

 
3/31/2015
 
001-11476
10.62(#)
 
Loan and Security Agreement between Vertex Energy, Inc., Vertex Energy Operating, LLC, Vertex Acquisition Sub, LLC, Vertex Refining LA, LLC, Vertex II GP, LLC, Vertex Merger Sub, LLC, Cedar Marine Terminals, LP, Crossroad Carriers, L.P., H & H Oil, L. P., and Vertex Recovery, L.P., as borrower and MidCap Business Credit LLC, as lender, dated March 27, 2015
 
 
 
8-K/A
 
10.3

 
6/16/2015
 
001-11476
10.63
 
Revolving Note by Vertex Energy, Inc., Vertex Energy Operating, LLC, Vertex Acquisition Sub, LLC, Vertex Refining LA, LLC, Vertex II GP, LLC, Vertex Merger Sub, LLC, Cedar Marine Terminals, LP, Crossroad Carriers, L.P., H & H Oil, L. P., and Vertex Recovery, L.P. in favor of MidCap Business Credit LLC dated March 27, 2015, in the face amount of up to $7 million [provided that notwithstanding the face amount of such Revolving Note, the Revolving Note only evidences amounts borrowed under such security from time to time]
 
 
 
8-K
 
10.4

 
3/31/2015
 
001-11476
10.64
 
Intercreditor Agreement dated March 26, 2015, by and between MidCap Business Credit LLC and Goldman Sachs Bank USA
 
 
 
8-K
 
10.5

 
3/31/2015
 
001-11476
10.65
 
Lease With Option For Membership Interest Purchase (April 30, 2015), by and between Vertex Refining NV, LLC as lessee and Bango Oil, LLC, as landowner
 
 
 
8-K
 
10.1

 
5/5/2015
 
001-11476
10.66
 
Acknowledgement and Confirmation Agreement (April 30, 2015), by and among Vertex Energy, Inc., Vertex Refining NV, LLC, Bango Oil, LLC, RESC, LLC, and Diatom Rail Park, LLC
 
 
 
8-K
 
10.2

 
5/5/2015
 
001-11476
10.67
 
Personal Property Lease (April 30, 2015), by and between Vertex Refining NV, LLC, Omega Refining, LLC and Bango Refining NV, LLC
 
 
 
8-K
 
10.3

 
5/5/2015
 
001-11476
10.68
 
Consent Letter (April 30, 2015) From Goldman Sachs Bank USA
 
 
 
8-K
 
10.4

 
5/5/2015
 
001-11476
10.69
 
Loan and Security Agreement between Vertex Energy, Inc., Vertex Energy Operating, LLC, Vertex Acquisition Sub, LLC, Vertex Refining LA, LLC, Vertex II GP, LLC, Vertex Merger Sub, LLC, Cedar Marine Terminals, LP, Crossroad Carriers, L.P., H & H Oil, L. P., and Vertex Recovery, L.P., as borrower and MidCap Business Credit LLC, as lender, dated March 27, 2015
 
 
 
8-K
 
10.3

 
6/16/2015
 
001-11476
10.70
 
Form of Unit Purchase Agreement dated June 19, 2015 by and between Vertex Energy, Inc. and the purchasers named therein
 
 
 
8-K
 
10.1

 
6/19/2015
 
001-11476

55



10.71
 
Third Amendment to Credit and Guaranty Agreement dated June 18, 2015, by and between Vertex Energy Operating, LLC, Vertex Energy, Inc., certain of the Company’s subsidiaries, Goldman Sachs Specialty Lending Holdings, Inc. (“Lender") and Goldman Sachs Bank USA, as Administrative Agent and Collateral Agent for Lender
 
 
 
8-K
 
10.2

 
6/24/2015
 
001-11476
10.72
 
Form of Warrant (incorporated by reference to Exhibit B of the Form of Unit Purchase Agreement incorporated by reference herein as Exhibit 10.69)
 
 
 
8-K
 
10.3

 
6/19/2015
 
001-11476
10.73
 
Executive Employment Agreement with Benjamin P. Cowart (August 7, 2015)***
 
X
 
 
 
 
 
 
 
 
10.74
 
Executive Employment Agreement with Chris Carlson (August 7, 2015)***
 
X
 
 
 
 
 
 
 
 
16.1
 
Letter dated April 30, 2015 From LBB & Associates Ltd., LLP
 
 
 
8-K
 
16.1

 
5/1/2015
 
001-11476
31.1
 
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
 
X
 
 
 
 
 
 
 
 
31.2
 
Certification of Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act
 
X
 
 
 
 
 
 
 
 
32.1
 
Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act**
 
X
 
 
 
 
 
 
 
 
32.2
 
Certification of Principal Accounting Officer Pursuant to Section 906 of the Sarbanes-Oxley Act**
 
X
 
 
 
 
 
 
 
 
99.1
 
Glossary of Selected Terms
 
 
 
10-K
 
99.1

 
12/31/2012
 
001-11476
101.INS++
 
XBRL Instance Document
 
X
 
 
 
 
 
 
 
 
101.SCH++
 
XBRL Taxonomy Extension Schema Document
 
X
 
 
 
 
 
 
 
 
101.CAL++
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
X
 
 
 
 
 
 
 
 
101.DEF++
 
XBRL Taxonomy Extension Definition Linkbase Document
 
X
 
 
 
 
 
 
 
 
101.LAB++
 
XBRL Taxonomy Extension Label Linkbase Document
 
X
 
 
 
 
 
 
 
 
101.PRE++
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
X
 
 
 
 
 
 
 
 
 
* Filed herewith.

** Furnished herewith.

*** Indicates management contract or compensatory plan or arrangement.
 
+ Certain portions of these documents (which portions have been replaced by "X's") have been omitted in connection with a request for Confidential Treatment which has been accepted by the Commission.   This entire exhibit including the omitted confidential information has been filed separately with the Commission.

# Certain portions of this document (which portions have been replaced by "***'s") have been omitted in connection with a request for Confidential Treatment which has been accepted by the Commission. This entire exhibit including the omitted confidential information has been filed separately with the Commission.


56



 ++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.


57