Building a TCEP re-refinery requires significantly less capital than a conventional re-refinery, which produces base oil instead of higher value feedstock or diesel replacement product. In addition, TCEP produces a higher yield finished product and is typically less expensive to operate than competing technologies. These lower capital and operating expenses will enable Vertex to build additional TCEP plants in the regions where our customers and feedstock sources are located, giving us a distinct competitive advantage in the marketplace.Our Refining and Marketing division engages in the aggregation of various feedstocks, including petroleum distillates, transmix, and chemical co-products that are re-refined into higher value end products and sold to end users. Some of the re-refined end products include gasoline blendstock, pygas, and fuel oil cutter stock. We partner with KMTEX on an outsourced basis to re-refine the feedstock we aggregate in our Refining and Marketing Division. Vertex sourced approximately 61 million gallons of hydrocarbon based products for the twelve months ended March 31, 2013. We source our feedstock from generators, pipeline operators, refineries, chemical processing facilities, and third-party providers. POSITIONING VERTEX FOR THE FUTURE Two important milestones occurred within the past 12 months that we believe will enhance the long-term value of our Company. In the third quarter of 2012, we completed the acquisition of 100% of the outstanding equity interests of Vertex Acquisition Sub, LLC. The acquired company integrated substantially all of the assets of Vertex Holdings, LLC and the related real estate property into Vertex Energy, Inc. The acquired company has both diversified and vertically integrated Vertex’s business, providing us with opportunities for significant growth and expansion. Further, the acquisition eliminated certain related-party transactions which previously distracted investors. In February 2013, Vertex reached a second important milestone when we uplisted our common stock trading under the symbol “VTNR” from the OTC Bulletin Board to the NASDAQ Capital Market (“NASDAQ”). We believe a NASDAQ listing provides “VTNR” with greater visibility in the marketplace, and will help to expand our shareholder base over time, provide better liquidity and more efficient trading of our common stock, and ultimately contribute to increased shareholder value.
FINANCIAL PERFORMANCE IN A CHALLENGING ECONOMIC ENVIRONMENTOver the last three years, Vertex has demonstrated strong growth in both revenue and volume of product sold, which is a key metric for our business that we use to gauge our market share. From fiscal year 2009 to fiscal year 2012, we grew total revenue by 246% from $38.7 million to $134 million and we grew volume of product sold by 58% from 0.9 million gallons to 1.4 million gallons. During the first quarter of 2013, we experienced lower volumes because of operational turnarounds at two key suppliers and there was significant volatility in the commodity markets which negatively impacted our business. As a result, we did miss analysts’ financial estimates; however, we believe we are well positioned coming out of this volatile period. In the first quarter of 2013, we reported consolidated revenue of $33.3 million, compared to $34.8 million for the prior year. The lower revenue was primarily the result of a decrease in commodity prices. However, this decline was offset by a 10% increase in volume of product sold, demonstrating that Vertex has the market reach to acquire feedstock to support our business. Gross profit increased 20% to $3.47 million from $2.89 million a year ago. This increase was due to our ability to source an increased amount of feedstock for TCEP with our own collection network rather than having to purchase the bulk of the raw materials from third parties. For the twelve months ended March 31, 2013, we collected 9 million gallons of used oil directly from our own network of over 2,500 generators, and we purchased used oil from a network of 50 collectors, aggregating 35 million additional gallons. We believe that our access to feedstock is a key competitive advantage and that Vertex is one of the largest purchasers of used motor oil in the U.S.
Selling, general, and administrative expenses increased mostly due to the addition of 90 employees as a result of the acquisition last year, which expanded our headcount from 12 to 102 employees. We anticipate that SG&A will remain above historical levels prior to the acquisition. However, we are working diligently to reduce SG&A expenses going forward. It is our belief that the company has the necessary infrastructure to support the future growth of the business.Net Income for the first quarter declined 31% to $1.08 million, or $0.05 per fully diluted share, from $1.57 million in the first quarter 2012, or $0.10 per fully diluted share. The decrease was primarily due to the increase in SG&A during the quarter and expenses associated with improvements to our TCEP operations. As mentioned in our first quarter conference call, we invested in our TCEP process to improve yield, throughput and product quality, which we believe is the best tactic to ensure that Vertex continues to maintain its competitive advantage. Along with the TCEP equipment we purchased, we incurred additional operating expenses which negatively impacted second quarter performance. in addition, market conditions had an impact on the value of our finished product value. Because of these factors, we anticipate our results will come in below consensus estimates. We expect second quarter revenue to be in the range of $32 million - $35 million and net income to be between $20,000 - $150,000 (subject to auditor adjustments and review). We believe this short-term sacrifice in EPS will better position our company for long-term, sustainable growth, and we expect our performance to improve during the second half of the year. We believe that revenue for 2013 will be $140 million - $150 million and net income will be $4.0 million - $5.0 million, or $0.25 - $0.30 per fully diluted share.
Our capital structure, including debt, is manageable and allows us the financial flexibility to access the capital markets if necessary.STRATEGY FOR LONG-TERM GROWTH Vertex Energy, Inc. is well positioned to capture share of the hydrocarbon recovery market. We believe that investors should view Vertex as a long-term growth play based on its flexible, scalable business model and key strategic initiatives to expand, acquire, build and integrate throughout the value chain of our industry. Vertex is focused on pursuing three key avenues that we believe offer the best opportunities for future growth and shareholder value creation. 1. Leverage our platform to increase feedstock volume. Controlling feedstock is crucial to our business and we intend to expand our diverse network of feedstock generators and collectors, which currently covers 13 states. To supplement our organic growth initiatives, we may also acquire collectors located near our re-refining facility and in other key geographies. Our existing aggregation network and long-standing relationships with collectors provides a steady acquisition pipeline. For the first quarter of 2013, our annual street collection run-rate was approximately 10 million gallons. Our goal is to increase our street collections to an annual run-rate of 18-20 million gallons. We currently realize an additional 25% of gross margin on TCEP finished product from street collected oil versus our aggregated third party oil. Our recent entry into the Dallas Fort Worth market is an example of our commitment to expand our street collections. This greenfield market development was made possible through the Acquisition. 2. Develop New Markets With TCEP. TCEP is a proprietary, replicable platform technology which uniquely positions Vertex to expand its footprint and unlock new markets. Our team has been working to identify regional markets where we can deploy our TCEP process, such as the Eastern Gulf of Mexico, Mid-Atlantic region, and the West Coast. We have demonstrated that a TCEP plant can be installed at a significantly lower up-front capital expense than a conventional base oil re-refining facility, which is the primary competing technology utilizing used oil as a feedstock. The estimated cost to build a TCEP plant with annual capacity of 30 million gallons is between $10 - $15 million, compared to similarly sized conventional base oil plants requiring approximately $50 million of capital investment. In addition, our end product has a higher yield and the operating expenses are typically lower than base oil re-refining. We also see opportunities for our TCEP technology to process various hydrocarbon streams other than conventional used motor oil. We will be evaluating additional supply markets, including but not limited to crude oils, refined products and refinery residuals from the maritime transportation industry. As an example of the flexibility of the TCEP process, during the BP Gulf Oil spill, we were able to receive and handle barge loads of crude oil through our TCEP process and convert this product to higher value fuel.
3. Capitalize on opportunities created through vertical integration. As a player in multiple aspects of our industry’s value chain, we are able to exploit opportunities that are tangential to used oil collection and processing. For example, we can convert used oil filters into high quality steel which is sold into steel markets. We have developed a turnkey model for waste antifreeze where we collect waste antifreeze, produce finished marketable coolants that meet all OEM specs, rebrand the product, and sell it back to the facilities where the waste antifreeze was originally collected. In the overall theme of addressing hydrocarbon markets, we believe our current business along with our process technology and our Port Arthur based Refining & Marketing Division will allow us to expand into other hydrocarbon markets.Vertex Energy now has the ability to build our collection network regionally and nationally to expand feedstock supply, replicate our TCEP process in additional markets across the country, and integrate our processes vertically into larger addressable hydrocarbon markets. We are flexible, efficient, and employ a scalable business model that maximizes feedstock supply through a dual-source street collection and aggregation approach. We have a strong management team, Board of Directors, and great employees that are committed to building a strong company that generates sustainable growth with improving financial performance for the long-term benefit of all our shareholders. Thank you for your continued support as we move forward to recover tomorrow’s energy today.
|Chairman and CEO|
|Vertex Energy, Inc.|