UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549


FORM 10-Q


[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2018
or

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934

For the transition period from _________ to __________

COMMISSION FILE NUMBER 1-33926
trecoralogoa01.jpg
TRECORA RESOURCES
(Exact name of registrant as specified in its charter)

DELAWARE
75-1256622
(State or other jurisdiction of
(I.R.S. employer incorporation or
organization)
identification no.)

1650 Hwy 6 South, Suite 190
77478
Sugar Land, Texas
(Zip code)
(Address of principal executive offices)
 

Registrant's telephone number, including area code:  (281) 980-5522

Former name, former address and former fiscal year, if
changed since last report.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Yes   X    No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes   X    No  
 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of "large accelerated filer," "accelerated filer,"  "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ____       Accelerated filer _ X__

Non-accelerated filer ____ (Do not check if a smaller reporting company)   Smaller reporting company ____

Emerging growth company_____






If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.____

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

Number of shares of the Registrant's Common Stock (par value $0.10 per share), outstanding at August 2, 2018: 24,486,654.





TABLE OF CONTENTS

Item Number and Description
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 






PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS.

TRECORA RESOURCES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
 
June 30,
2018
(Unaudited)
 
December 31,
2017
ASSETS
 
(thousands of dollars)
  Current Assets
 
 
 
 
Cash
 
$
3,387

 
$
3,028

Trade receivables, net
 
26,467

 
25,779

Insurance receivable
 
493

 

Inventories
 
17,003

 
18,450

Prepaid expenses and other assets
 
5,188

 
4,424

Taxes receivable
 
1,291

 
5,584

Total current assets
 
53,829

 
57,265

 
 
 
 
 
  Plant, pipeline and equipment, net
 
192,084

 
181,742

 
 
 
 
 
Goodwill
 
21,798

 
21,798

Intangible assets, net
 
19,877

 
20,808

Investment in AMAK
 
45,452

 
45,125

Mineral properties in the United States
 
588

 
588

 
 
 
 
 
TOTAL ASSETS
 
$
333,628

 
$
327,326

LIABILITIES
 
 
 
 
Current Liabilities
 
 
 
 
Accounts payable
 
$
11,927

 
$
18,347

Accrued liabilities
 
5,638

 
3,961

Current portion of post-retirement benefit
 
28

 
305

Current portion of long-term debt
 
8,061

 
8,061

Current portion of other liabilities
 
916

 
870

Total current liabilities
 
26,570

 
31,544

 
 
 
 
 
  Long-term debt, net of current portion
 
97,015

 
91,021

  Post-retirement benefit, net of current portion
 
365

 
897

  Other liabilities, net of current portion
 
1,297

 
1,611

Deferred income taxes
 
18,315

 
17,242

Total liabilities
 
143,562

 
142,315

 
 
 
 
 
EQUITY
 
 
 
 
  Common stock‑authorized 40 million shares of $.10 par value; issued 24.5 million in 2018 and 2017 and outstanding 24.3 million shares in 2018 and 2017
 
2,451

 
2,451

Additional paid-in capital
 
56,365

 
56,012

Common stock in treasury, at cost
 
(61
)
 
(196
)
Retained earnings
 
131,022

 
126,455

Total Trecora Resources Stockholders' Equity
 
189,777

 
184,722

Noncontrolling Interest
 
289

 
289

Total equity
 
190,066

 
185,011

 
 
 
 
 
TOTAL LIABILITIES AND EQUITY
 
$
333,628

 
$
327,326


See notes to consolidated financial statements.

 
 
 
1
 




TRECORA RESOURCES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
 
 
THREE MONTHS ENDED
JUNE 30,
 
SIX MONTHS ENDED JUNE 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(thousands of dollars)
 
(thousands of dollars)
REVENUES
 
 
 
 
 
 
 
 
Petrochemical and Product Sales
 
$
63,569

 
$
57,016

 
$
130,268

 
$
107,915

Processing Fees
 
4,537

 
5,099

 
9,579

 
9,742

 
 
68,106

 
62,115

 
139,847

 
117,657

 
 
 
 
 
 
 
 
 
OPERATING COSTS AND EXPENSES
 
 
 
 
 
 
 
 
Cost of Sales and Processing
 
 
 
 
 
 
 
 
(including depreciation and amortization of $2,837, $2,363, $5,667, and $4,746, respectively)
 
59,964

 
51,008

 
121,565

 
95,932

 
 
 
 
 
 
 
 
 
    GROSS PROFIT
 
8,142

 
11,107

 
18,282

 
21,725

 
 
 
 
 
 
 
 
 
GENERAL AND ADMINISTRATIVE EXPENSES
 
 
 
 
 
 
 
 
General and Administrative
 
4,554

 
5,740

 
10,889

 
11,961

Depreciation
 
191

 
205

 
387

 
410

 
 
4,745

 
5,945

 
11,276

 
12,371

 
 
 
 
 
 
 
 
 
OPERATING INCOME
 
3,397

 
5,162

 
7,006

 
9,354

 
 
 
 
 
 
 
 
 
OTHER INCOME (EXPENSE)
 
 
 
 
 
 
 
 
Interest Income
 
14

 

 
21

 

Interest Expense
 
(815
)
 
(678
)
 
(1,693
)
 
(1,314
)
Equity in Earnings (Losses) of AMAK
 
228

 
(3,298
)
 
458

 
(4,264
)
Miscellaneous Expense
 
(13
)
 
(22
)
 
(39
)
 
(64
)
 
 
(586
)
 
(3,998
)
 
(1,253
)
 
(5,642
)
 
 
 
 
 
 
 
 
 
INCOME BEFORE INCOME TAXES
 
2,811

 
1,164

 
5,753

 
3,712

 
 
 
 
 
 
 
 
 
INCOME TAXES
 
596

 
332

 
1,186

 
1,393

 
 
 
 
 
 
 
 
 
NET INCOME
 
2,215

 
832

 
4,567

 
2,319

 
 
 
 
 
 
 
 
 
NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST
 

 

 

 

 
 
 
 
 
 
 
 
 
NET INCOME ATTRIBUTABLE TO TRECORA RESOURCES
 
$
2,215

 
$
832

 
$
4,567

 
$
2,319

 
 
 
 
 
 
 
 
 
Basic Earnings per Common Share
 
 
 
 
 
 
 
 
Net Income Attributable to Trecora Resources (dollars)
 
$
0.09

 
$
0.03

 
$
0.19

 
$
0.10

 
 
 
 
 
 
 
 
 
Basic Weighted Average Number of Common Shares Outstanding
 
24,370

 
24,256

 
24,354

 
24,248

 
 
 
 
 
 
 
 
 
Diluted Earnings per Common Share
 
 
 
 
 
 
 
 
Net Income Attributable to Trecora Resources (dollars)
 
$
0.09

 
$
0.03

 
$
0.18

 
$
0.09

 
 
 
 
 
 
 
 
 
Diluted Weighted Average Number of Common Shares Outstanding
 
25,014

 
25,034

 
25,119

 
25,044


See notes to consolidated financial statements.

 
 
 
2
 




TRECORA RESOURCES AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)

 
 
TRECORA RESOURCES STOCKHOLDERS
 
 
 
 
 
 
COMMON STOCK
 
ADDITIONAL
PAID-IN
 
TREASURY
 
RETAINED
 
 
 
NON-
CONTROLLING
 
TOTAL
 
 
SHARES
 
AMOUNT
 
CAPITAL
 
STOCK
 
EARNINGS
 
TOTAL
 
INTEREST
 
EQUITY
 
 
(thousands)

 
(thousands of dollars)
January 1, 2018
 
24,311

 
$
2,451

 
$
56,012

 
$
(196
)
 
$
126,455

 
$
184,722

 
$
289

 
$
185,011

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stock Options
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Issued to Directors
 

 

 
(10
)
 

 

 
(10
)
 

 
(10
)
Issued to Employees
 

 

 
154

 

 

 
154

 

 
154

Cancellations (see Note 13)
 

 

 
(680
)
 

 

 
(680
)
 

 
(680
)
Restricted Stock Units
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Issued to Directors
 

 

 
175

 

 

 
175

 

 
175

Issued to Employees
 

 

 
734

 

 

 
734

 

 
734

Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Issued to Directors
 

 

 
(78
)
 
37

 

 
(41
)
 

 
(41
)
Issued to Employees
 

 

 
132

 
154

 

 
286

 

 
286

Stock Exchange (see Notes 8 & 17)
 

 

 
(65
)
 
(65
)
 

 
(130
)
 

 
(130
)
Warrants
 

 

 
(9
)
 
9

 

 

 

 

Net Income
 

 

 

 

 
4,567

 
4,567

 

 
4,567

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2018
 
24,311

 
$
2,451

 
$
56,365

 
$
(61
)
 
$
131,022

 
$
189,777

 
$
289

 
$
190,066


See notes to consolidated financial statements.


 
 
 
3
 




TRECORA RESOURCES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
 
SIX MONTHS ENDED
JUNE 30,
 
 
2018
 
2017
 
 
(thousands of dollars)
OPERATING ACTIVITIES
 
 
 
 
Net Income
 
$
4,567

 
$
2,319

Adjustments to Reconcile Net Income
 
 
 
 
To Net Cash Provided by Operating Activities:
 
 
 
 
Depreciation and Amortization
 
4,941

 
4,226

Amortization of Intangible Assets
 
931

 
931

Unrealized Gain on Derivative Instruments
 

 
(38
)
Stock-based Compensation
 
372

 
1,289

Deferred Income Taxes
 
1,073

 
505

Postretirement Obligation
 
(809
)
 
(5
)
Equity in (Earnings) Losses of AMAK
 
(458
)
 
4,264

Bad Debt Expense
 
128

 

Amortization of Loan Fees
 
161

 
61

Changes in Operating Assets and Liabilities:
 
 
 
 
Increase in Trade Receivables
 
(817
)
 
(2,839
)
Increase in Insurance Receivables
 
(493
)
 

Decrease in Taxes Receivable
 
4,293

 
783

Decrease in Inventories
 
1,448

 
2,752

(Increase) Decrease in Prepaid Expenses and Other Assets
 
(901
)
 
36

Increase (Decrease) in Accounts Payable and Accrued Liabilities
 
(4,742
)
 
114

Increase in Other Liabilities
 
104

 
1,129

Net Cash Provided by Operating Activities
 
9,798

 
15,527

 
 
 
 
 
INVESTING ACTIVITIES
 
 
 
 
Additions to Plant, Pipeline and Equipment
 
(15,434
)
 
(27,833
)
Advances to AMAK, net
 
(83
)
 
(55
)
Cash Used in Investing Activities
 
(15,517
)
 
(27,888
)
 
 
 
 
 
FINANCING ACTIVITIES
 
 
 
 
Issuance of Common Stock
 

 
25

Net Cash Received (Paid) Related to Stock-Based Compensation
 
245

 
(55
)
Addition to Long-Term Debt
 
16,000

 
12,000

Repayment of Long-Term Debt
 
(10,167
)
 
(6,250
)
Net Cash Provided by Financing Activities
 
6,078

 
5,720

 
 
 
 
 
NET INCREASE (DECREASE) IN CASH
 
359

 
(6,641
)
 
 
 
 
 
CASH AT BEGINNING OF PERIOD
 
3,028

 
8,389

 
 
 
 
 
CASH AT END OF PERIOD
 
$
3,387

 
$
1,748

Supplemental disclosure of cash flow information:
 
 
Cash payments for interest
 
$
2,394

 
$
2,721

Cash payments for taxes, net of refunds
 
$
92

 
$
220

Supplemental disclosure of non-cash items:
 
 
 
 
Capital expansion amortized to depreciation expense
 
$
210

 
$
435

Stock exchange (Notes 8 & 17)
 
$
130

 
$


See notes to consolidated financial statements.

 
 
 
4
 




TRECORA RESOURCES AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


1. GENERAL

Organization

Trecora Resources (the "Company") was incorporated in the State of Delaware in 1967. Our principal business activities are the manufacturing of various specialty hydrocarbons and synthetic waxes and the provision of custom processing services.   Unless the context requires otherwise, references to "we," "us," "our," and the "Company" are intended to mean Trecora Resources and its subsidiaries.

This document includes the following abbreviations:
(1)
TREC – Trecora Resources
(2)
TOCCO – Texas Oil & Chemical Co. II, Inc. – Wholly owned subsidiary of TREC and parent of SHR and TC
(3)
SHR – South Hampton Resources, Inc. – Petrochemical segment and parent of GSPL
(4)
GSPL – Gulf State Pipe Line Co, Inc. – Pipeline support for the petrochemical segment
(5)
TC – Trecora Chemical, Inc. – Specialty wax segment
(6)
AMAK – Al Masane Al Kobra Mining Company – Mining equity investment – 33% ownership
(7)
PEVM – Pioche Ely Valley Mines, Inc. – Inactive mine - 55% ownership

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America ("GAAP") for interim financial information and in conformity with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, these unaudited financial statements do not include all of the information and footnotes required by GAAP for complete financial statements and, therefore, should be read in conjunction with the financial statements and related notes contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2017.

The unaudited condensed financial statements included in this document have been prepared on the same basis as the annual condensed financial statements and in management's opinion reflect all adjustments, including normal recurring adjustments, necessary to present fairly the Company's financial position, results of operations and cash flows for the interim periods presented.  We have made estimates and judgments affecting the amounts reported in this document.  The actual results that we experience may differ materially from our estimates.  In the opinion of management, the disclosures included in these financial statements are adequate to make the information presented not misleading.

Operating results for the six months ended June 30, 2018 are not necessarily indicative of results for the year ending December 31, 2018.

We currently operate in two segments, specialty petrochemical products and specialty synthetic waxes.  All revenue originates from United States' sources, and all long-lived assets owned are located in the United States.

In addition, we own a 33% interest in AMAK, a Saudi Arabian closed joint stock company, which owns, operates and is developing mining assets in Saudi Arabia.  We account for our investment under the equity method of accounting.   See Note 17.

Revenue Recognition

The Company adopted Financial Accounting Standards Board ("FASB") ASC Topic 606 ("ASC 606"),  Revenue from Contracts with Customers and its amendments with a date of the initial application of January 1, 2018. As a result, the Company has changed its accounting policy for revenue recognition as detailed below.  ASC 606 outlines a single comprehensive model for an entity to use in accounting for revenue arising from all contracts with customers except where revenues are in scope of another accounting standard. ASC 606 superseded the revenue recognition requirements in ASC Topic 605, "Revenue Recognition", and most industry specific guidance. ASC Topic 606 sets forth a five-step model for determining when and how revenue is recognized. Under the model, an entity is required to recognize revenue to depict the transfer of goods or services

 
 
 
5
 




to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods and services. ASC 606 also requires certain additional revenue-related disclosures.

The Company applied the modified retrospective approach under ASC 606 which allows for the cumulative effect of adopting the new guidance on the date of initial application. Use of the modified retrospective approach means the Company's comparative periods prior to initial application are not restated. The initial application was applied to all contracts at the date of the initial application.   The Company has determined that the adjustments using the modified retrospective approach did not have a material impact on the date of the initial application along with the disclosure of the effect on prior periods.

Accounting Policy

Beginning on January 1, 2018, revenue is measured based on a consideration specified in a contract with a customer. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer. In evaluating when a customer has control of the asset we primarily consider whether the transfer of legal title and physical delivery has occurred, whether the customer has significant risks and rewards of ownership, and whether the customer has accepted delivery and a right to payment exists. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of product sales and processing. The Company does not offer material rights of return or service-type warranties.

For the six months ended June 30, 2017 the Company recognized revenue according to FASB ASC Topic 605, "Revenue Recognition", ("ASC 605"), when (1) the customer accepted delivery of the product and title had been transferred or when the service was performed and the Company had no significant obligations remaining to be performed; (2) a final understanding as to specific nature and terms of the agreed upon transaction had occurred; (3) price was fixed and determinable; and (4) collection was assured.  Product sales generally met these criteria, and revenue was recognized, when the product was delivered or title was transferred to the customer.  Sales revenue was presented net of discounts, allowances, and sales taxes.  Freight costs billed to customers were recorded as a component of revenue.  Revenues received in advance of future sales of products or prior to the performance of services were presented as deferred revenues. Shipping and handling costs were classified as cost of product sales and processing and were expensed as incurred.

Nature of goods and services

The following is a description of principal activities – separated by reportable segments – from which the Company generates its revenue. For more detailed information about reportable segments, disaggregation of revenues, and contract balance disclosures, see Note 14.

Petrochemical segment
The petrochemical segment of the Company produces eight high purity hydrocarbons and other petroleum based products including isopentane, normal pentane, isohexane and hexane. These products are used in the production of polyethylene, packaging, polypropylene, expandable polystyrene, poly-iso/urethane foams, crude oil from the Canadian tar sands, and in the catalyst support industry. SHR's petrochemical products are typically transported to customers by rail car, tank truck, iso-container and ship.
Product Sales - The Company sells individual (distinct) products to its customers on a stand-alone basis (point-of-sale) without any further integration.  There is no significant modification of any one or more products sold to fulfill another promised product or service within any of the Company's product sale transactions.  The amount of consideration received for product sales is stated within the executed invoice with the customer. Payment is typically due and collected 30 to 60 days subsequent to point of sale.
Processing Fees - The Company's promised services consist of processing customer supplied feedstocks into custom products including, if requested, services for forming, packaging, and arranging shipping.  Pursuant to Tolling Agreements the customer retains title to the feedstocks and processed products.  The performance obligation in each Tolling Agreement transaction is the processing of customer provided feedstocks into custom products and is satisfied over time.   The amount of consideration received for product sales is stated within the executed invoice with the customer. Payment is typically due and collected within 30 days subsequent to point of sale.


 
 
 
6
 




Specialty Wax segment
The specialty wax segment of the Company manufactures and sells specialty polyethylene and poly alpha olefin waxes and also provides custom processing services for customers.
Product Sales - The Company sells individual (distinct) products to its customers on a stand-alone basis (point-of-sale) without any further integration.  There is no significant modification of any one or more products sold to fulfill another promised product or service within any of the Company's product sale transactions.  The amount of consideration received for product sales is stated within the executed invoice with the customer. Payment is typically due and collected within 30 days subsequent to point of sale.
Processing Fees - The Company's promised services consist of processing customer supplied feedstocks into custom products including, if requested, services for forming, packaging, and arranging shipping.  Pursuant to Tolling Agreements and Purchase Order Arrangements, the customer typically retains title to the feedstocks and processed products.  The performance obligation in each Tolling Agreement transaction and Purchase Order Arrangement is the processing of customer provided feedstocks into custom products and is satisfied over time.   The amount of consideration received for product sales is stated within the executed invoice with the customer. Payment is typically due and collected within 30 days subsequent to point of sale.


2. RECENT ACCOUNTING PRONOUNCEMENTS

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09,  Revenue from Contracts with Customers ("ASU 2014-09"). ASU 2014-09 supersedes the revenue recognition requirements of FASB Accounting Standards Codification ("ASC") Topic 605,  Revenue Recognition and most industry-specific guidance throughout the Accounting Standards Codification, resulting in the creation of FASB ASC Topic 606,  Revenue from Contracts with Customers. ASU 2014-09 requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. This ASU provides alternative methods of retrospective adoption and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The Company completed its assessment of the impact of the adoption of ASU 2014-09 across all revenue streams.  This included reviewing current accounting policies and practices to identify potential differences that would result from applying the requirements under the new standard.  We completed contract reviews and validated results of applying the new revenue guidance (Note 1). 

In February 2016, the FASB issued ASU No. 2016-02,  Leases (Topic 842), and has subsequently issued several supplemental and/or clarifying ASUs to increase transparency and comparability among organizations by recognizing all lease transactions (with terms in excess of 12 months) on the balance sheet as a lease liability and a right-of-use asset (as defined). The ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with earlier application permitted.   Upon adoption, the lessee will apply the new standard retrospectively to all periods presented or retrospectively using a cumulative effect adjustment in the year of adoption.  The Company has several lease agreements for which the amendments will require the Company to recognize a lease liability to make lease payments and a right-of-use asset which will represent its right to use the underlying asset for the lease term. The Company is currently reviewing the amendments to ensure it is fully compliant by the adoption date and does not expect to early adopt. As permitted by the amendments, the Company is anticipating electing an accounting policy to not recognize lease assets and lease liabilities for leases with a term of twelve months or less. The Company is in the process of fully evaluating the amendments and will subsequently implement new processes. In addition, the Company will change its current accounting policies to comply with the amendments with such changes as mentioned above.

In February 2018, the FASB issued ASU No. 2018-02,  Income Statement — Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. ASU 2018-02 was issued to address the income tax accounting treatment of the stranded tax effects within other comprehensive income due to the prohibition of backward tracing due to an income tax rate change that was initially recorded in other comprehensive income due to the enactment of the Tax Cuts and Jobs Act ("TCJA") on December 22, 2017, which changed the Company's income tax rate from 35% to 21%. The amendments to the ASU changed US GAAP whereby an entity may elect to reclassify the stranded tax effect from accumulated other comprehensive income to retained earnings. The amendments of the ASU may be adopted in total or in part using a full retrospective or modified retrospective method. The amendments of the ASU are effective for periods beginning after December 15, 2018. Early adoption is permitted. The Company believes there will be no material impact to the consolidated financial statements as a result of this update.


 
 
 
7
 




In June 2018, the FASB issued ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting. ASU 2018-07 simplifies the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees, with certain exceptions. The amendments in this ASU are effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. The Company is assessing the effect of ASU 2018-02 on its consolidated financial statements.




3. TRADE RECEIVABLES

Trade receivables, net, consisted of the following:
 
 
June 30, 2018

 
December 31, 2017

 
 
(thousands of dollars)
Trade receivables
 
$
26,895

 
$
26,079

Less allowance for doubtful accounts
 
(428
)
 
(300
)
Trade receivables, net
 
$
26,467

 
$
25,779


Trade receivables serves as collateral for our amended and restated credit agreement. See Note 10.

4. PREPAID EXPENSES AND OTHER ASSETS

Prepaid expenses and other assets consisted of the following:
 
 
June 30, 2018

 
December 31, 2017

 
 
(thousands of dollars)
Prepaid license
 
$
1,919

 
$
1,919

Prepaid catalyst
 
682

 
779

Prepaid insurance
 
115

 

Spare parts
 
1,349

 
954

Other prepaid expenses and assets
 
1,123

 
772

Total
 
$
5,188

 
$
4,424


5. INVENTORIES

Inventories included the following:
 
 
June 30, 2018

 
December 31, 2017

 
 
(thousands of dollars)
Raw material
 
$
3,147

 
$
3,703

Work in process
 

 
27

Finished products
 
13,856

 
14,720

Total inventory
 
$
17,003

 
$
18,450


Inventory serves as collateral for our amended and restated credit agreement.  See Note 10.

Inventory included petrochemical products in transit valued at approximately $3.9 million and $3.7 million at June 30, 2018, and December 31, 2017, respectively.






 
 
 
8
 













6. PLANT, PIPELINE AND EQUIPMENT

Plant, pipeline and equipment consisted of the following:
 
 
June 30, 2018

 
December 31, 2017

 
 
(thousands of dollars)
Platinum catalyst metal
 
$
1,612

 
$
1,612

Land
 
5,428

 
5,428

Plant, pipeline and equipment
 
189,866

 
186,946

Construction in progress
 
63,510

 
50,996

Total plant, pipeline and equipment
 
260,416

 
244,982

Less accumulated depreciation
 
(68,332
)
 
(63,240
)
Net plant, pipeline and equipment
 
$
192,084

 
$
181,742


Plant, pipeline, and equipment serve as collateral for our amended and restated credit agreement. See Note 10.

Interest capitalized for construction was approximately $427,000 and $287,000 for the three and $731,000 and $660,000 for the six months ended June 30, 2018 and 2017, respectively.

Labor capitalized for construction was approximately $0.9 million and $0.9 million for the three and $2.1 million and $1.6 million for the six months ended June 30, 2018, and 2017, respectively.

Construction in progress during the first six months of 2018 included equipment purchased for various equipment updates at the TC facility; new reformer unit, tankage upgrades, and an addition to the rail spur at SHR.

Amortization relating to the platinum catalyst, which is included in cost of sales, was approximately $0 and $0 for the three and $0 and $25,000 for the six months ended June 30, 2018 and 2017, respectively.

7. GOODWILL AND INTANGIBLE ASSETS, NET

Goodwill and intangible assets were recorded in relation to the acquisition of TC on October 1, 2014.

The following tables summarize the gross carrying amounts and accumulated amortization of intangible assets by major class (in thousands):

 
 
 
9
 




 
 
June 30, 2018
 
Intangible assets subject to amortization (Definite-lived)
 
Gross
 
Accumulated
Amortization
 
Net
Customer relationships
 
$
16,852

 
$
(4,213
)
 
$
12,639

Non-compete agreements
 
94

 
(71
)
 
23

Licenses and permits
 
1,471

 
(443
)
 
1,028

Developed technology
 
6,131

 
(2,299
)
 
3,832

 
 
24,548

 
(7,026
)
 
17,522

Intangible assets not subject to amortization (Indefinite-lived)
 
 
 
 
 
 
Emissions Allowance
 
197

 

 
197

Trade name
 
2,158

 

 
2,158

Total
 
$
26,903

 
$
(7,026
)
 
$
19,877


 
 
December 31, 2017
 
Intangible assets subject to amortization (Definite-lived)
 
Gross
 
Accumulated
Amortization
 
Net
Customer relationships
 
$
16,852

 
$
(3,651
)
 
$
13,201

Non-compete agreements
 
94

 
(61
)
 
33

Licenses and permits
 
1,471

 
(390
)
 
1,081

Developed technology
 
6,131

 
(1,993
)
 
4,138

 
 
24,548

 
(6,095
)
 
18,453

Intangible assets not subject to amortization (Indefinite-lived)
 
 
 
 
 
 
Emissions Allowance
 
197

 

 
197

Trade name
 
2,158

 

 
2,158

Total
 
$
26,903

 
$
(6,095
)
 
$
20,808


Amortization expense for intangible assets included in cost of sales for the three months ended June 30, 2018, and 2017, was approximately $465,000 and $466,000, and for the six months ended June 30, 2018, and 2017, was approximately $931,000 and $931,000, respectively.

Based on identified intangible assets that are subject to amortization as of June 30, 2018, we expect future amortization expenses for each period to be as follows (in thousands):

 
 
Total

 
Remainder of 2018

 
2019

 
2020

 
2021

 
2022

 
2023

 
Thereafter

Customer relationships
 
$
12,639

 
$
562

 
$
1,123

 
$
1,123

 
1,123

 
1,123

 
1,123

 
$
6,462

Non-compete agreements
 
23

 
9

 
14

 

 

 

 

 

Licenses and permits
 
1,028

 
53

 
106

 
106

 
101

 
86

 
86

 
490

Developed technology
 
3,832

 
307

 
613

 
613

 
613

 
613

 
613

 
460

Total future amortization expense
 
$
17,522

 
$
931

 
$
1,856

 
$
1,842

 
$
1,837

 
$
1,822

 
$
1,822

 
$
7,412


8. NET INCOME PER COMMON SHARE ATTRIBUTABLE TO TRECORA RESOURCES

The following table (in thousands, except per share amounts) sets forth the computation of basic and diluted net income per share attributable to Trecora Resources for the three months ended June 30, 2018 and 2017, respectively.


 
 
 
10
 




 
 
Three Months Ended
June 30, 2018
 
Three Months Ended
June 30, 2017
 
 
Income

 
Shares

 
Per Share
Amount

 
Income

 
Shares

 
Per Share
Amount

Basic Net Income per Share:
 
 
 
 
 
 
 
 
 
 
 
 
Net Income Attributable to Trecora Resources
 
$
2,215

 
24,370

 
$
0.09

 
$
832

 
24,256

 
$
0.03

Unvested restricted stock units
 
 
 
349

 
 
 
 
 
379

 
 
Dilutive stock options outstanding
 
 
 
295

 
 
 
 
 
399

 
 
Diluted Net Income per Share:
 
 
 
 
 
 
 
 
 
 
 
 
Net Income Attributable to Trecora Resources
 
$
2,215

 
25,014

 
$
0.09

 
$
832

 
25,034

 
$
0.03


 
 
Six Months Ended
June 30, 2018
 
Six Months Ended
June 30, 2017
 
 
Income

 
Shares

 
Per Share
Amount

 
Income

 
Shares

 
Per Share
Amount

Basic Net Income per Share:
 
 
 
 
 
 
 
 
 
 
 
 
Net Income Attributable to Trecora Resources
 
$
4,567

 
24,354

 
$
0.19

 
$
2,319

 
24,248

 
$
0.10

Unvested restricted stock units
 
 
 
376

 
 
 
 
 
350

 
 
Dilutive stock options outstanding
 
 
 
389

 
 
 
 
 
446

 
 
Diluted Net Income per Share:
 
 
 
 
 
 
 
 
 
 
 
 
Net Income Attributable to Trecora Resources
 
$
4,567

 
25,119

 
$
0.18

 
$
2,319

 
25,044

 
$
0.09


At June 30, 2018 and 2017, 924,860 and 1,334,087 shares of common stock, respectively, were issuable upon the exercise of options and warrants.

In first quarter 2018, we completed an exchange of shares with certain shareholders whereby such shareholders traded 65,000 common shares of TREC in exchange for 24,489 shares of our AMAK stock.  The 65,000 shares were accounted for as treasury stock.

9. ACCRUED LIABILITIES

Accrued liabilities consisted of the following:
 
 
June 30, 2018

 
December 31, 2017

 
 
(thousands of dollars)
Accrued state taxes
 
$
295

 
$
272

Accrued property taxes
 
900

 

Accrued payroll
 
910

 
1,407

Accrued interest
 
31

 
30

Accrued officer compensation
 
600

 
500

Other
 
2,902

 
1,752

Total
 
$
5,638

 
$
3,961


10. LIABILITIES AND LONG-TERM DEBT

On October 1, 2014, we entered into an Amended and Restated Credit Agreement ("ARC") with the lenders which from time to time are parties to the ARC and Bank of America, N.A., as Administrative Agent for the Lenders, and Merrill Lynch, Pierce, Fenner & Smith Incorporated as Lead Arranger. On March 28, 2017, we entered into a Second Amendment to the ARC with terms which increased the Maximum Consolidated Leverage Ratio financial covenant of 3.25x to 4.00x at March 31, 2017, and 4.25x at June 30, 2017, before stepping down to 3.75x at September 30, 2017, 3.50x at December 31, 2017, and reverting to the original financial covenant of 3.25x at March 31, 2018.

For Fiscal Quarter Ending
Maximum Consolidated Leverage Ratio
March 31, 2017
4.00 to 1.00
June 30, 2017
4.25 to 1.00
September 30, 2017
3.75 to 1.00
December 31, 2017
3.50 to 1.00
March 31, 2018 and each fiscal quarter thereafter
3.25 to 1.00
 
 

The Second Amendment also reduced the Minimum Consolidated Fixed Charge Coverage Ratio of 1.25x to 1.10x at March 31, 2017, 1.05x at June 30, 2017 and September 30, 2017, 1.10x at December 31, 2017, before reverting to the original financial covenant of 1.25x at March 31, 2018.

 
 
 
11
 





For Fiscal Quarter Ending
Minimum Consolidated Fixed Charge Coverage Ratio
March 31, 2017
1.10 to 1.00
June 30, 2017
1.05 to 1.00
September 30, 2017
1.05 to 1.00
December 31, 2017
1.10 to 1.00
March 31, 2018 and each fiscal quarter thereafter
1.25 to 1.00

Also, under the terms of the Second Amendment, two additional levels of pricing were added – levels 4 and 5.

Level
 
Consolidated Leverage Ratio
 
LIBOR Margin
 
Base Rate Margin
 
Commitment Fee
1
 
Less than 1.50 to 1.00
 
2.00%
 
1.00%
 
0.25%
2
 
Greater than or equal to 1.50 to 1.00 but less than 2.00 to 1.00
 
2.25%
 
1.25%
 
0.25%
3
 
Greater than or equal to 2.00 to 1.00 but less than 3.00 to 1.00
 
2.50%
 
1.50%
 
0.375%
4
 
Greater than or equal to 3.00 to 1.00 but less than 3.50 to 1.00
 
2.75%
 
1.75%
 
0.375%
5
 
Greater than or equal to 3.50 to 1.00
 
3.00%
 
2.00%
 
0.375%

We were in compliance with all covenants at June 30, 2018.

On July 25, 2017, TOCCO, SHR, GSPL, and TC (SHR, GSPL and TC collectively, the "Guarantors") entered into a Third Amendment to Amended and Restated Credit Agreement ("3rd Amendment") with the lenders which from time to time are parties to the Amended and Restated Credit  Agreement (collectively, the "Lenders") and Bank of America, N.A., a national banking association, as Administrative Agent for the Lenders.  The 3rd Amendment increased the Revolving Facility from $40.0 million to $60.0 million.  There were no other changes to the Revolving Facility.  Following the effectiveness of the 3rd Amendment, we had a $60.0 million revolving line of credit with a maturity date of October 1, 2019.  As of June 30, 2018, and December 31, 2017, there was a long-term amount of $45.0 million and $35.0 million outstanding, respectively.  The interest rate on the loan varies according to several options.  Interest on the loan is paid monthly and a commitment fee of between 0.25% and 0.375% is due quarterly on the unused portion of the loan.  At June 30, 2018, approximately $14.9 million was available to be drawn; however, only $10.0 million could be drawn while maintaining compliance with our covenants.

Under the ARC, we also borrowed $70.0 million in a single advance term loan (the "Acquisition Loan") to partially finance the acquisition of TC.  Interest on the Acquisition Loan was payable quarterly using a ten-year commercial style amortization.  Principal was also payable on the last business day of each March, June, September and December in an amount equal to $1.8 million, provided that the final installment would have occurred on the October 1, 2019 maturity date and would have been in an amount equal to the then outstanding unpaid principal balance of the Acquisition Loan.  At June 30, 2018, there was a short-term amount of $7.0 million and a long-term amount of $36.8 million outstanding.  At December 31, 2017, there was a short-term amount of $7.0 million and a long-term amount of $40.3 million outstanding.

Under the ARC, we also had the right to borrow $25.0 million in a multiple advance loan ("Term Loans").  Borrowing availability under the Term Loans ended on December 31, 2015.  The Term Loans converted from a multiple advance loan to a "mini-perm" loan once certain obligations were fulfilled such as certification that construction of D-Train was completed in a good and workmanlike manner, receipt of applicable permits and releases from governmental authorities, and receipt of releases of liens from the contractor and each subcontractor and supplier.  Interest on the Term Loans was paid monthly.  Principal was also payable on the last business day of each March, June, September and December in an amount equal to $0.3 million, provided that the final installment would have occurred on the October 1, 2019 maturity date and would have been in an amount equal to the then outstanding unpaid principal balance of the Term Loans. At June 30, 2018, there was a short-term amount of $1.3 million and a long-term amount of $15.7 million outstanding.  At December 31, 2017, there was a short-term amount of $1.3 million and a long-term amount of $16.0 million outstanding.

On July 31, 2018, TOCCO and the Guarantors entered into a Fourth Amendment to Amended and Restated Credit Agreement, which, among other things, increased the commitment under the Revolving Facility to $75.0 million, increased term loan borrowings under the ARC to $87.5 million in a single term loan facility (the “Term Loan Facility”), comprising new term loan
borrowings and the previously outstanding borrowings under the Acquisition Loan and Term Loans, and extended the maturity date of the ARC to July 31, 2023. See Note 20.

 
 
 
12
 




Debt issuance costs of approximately $0.3 million and $0.5 million for the periods ended June 30, 2018 and December 31, 2017, have been netted against outstanding loan balances.   The interest rate on all of the above loans varies according to several options as defined in the ARC.  At June 30, 2018, and December 31, 2017, the rate was 4.38% and 4.07%, respectively.

The following table summarizes the carrying amounts and debt issuance costs of our long-term debt (in thousands):

 
June 30, 2018

 
December 31, 2017

Acquisition loan
$
43,750

 
$
47,250

Term loan
16,666

 
17,333

Revolving facility
45,000

 
35,000

Total
105,416

 
99,583

Debt issuance costs
(340
)
 
(501
)
Total long-term debt
$
105,076

 
$
99,082

Less current portion including loan fees
8,061

 
8,061

Total long-term debt, less current portion including loan fees
$
97,015

 
$
91,021


11. FAIR VALUE MEASUREMENTS

The carrying value of cash, trade receivables, accounts payable, accrued liabilities, and other liabilities approximate fair value due to the immediate or short-term maturity of these financial instruments. The fair value of variable rate long term debt reflects recent market transactions and approximate carrying value.  We used other observable inputs that would qualify as Level 2 inputs to make our assessment of the approximate fair value of our cash, trade receivables,  accounts payable, accrued liabilities, other liabilities and variable rate long term debt.  The fair value of the derivative instruments are described below.

Interest Rate Swap

In March 2008 we entered into an interest rate swap agreement with Bank of America related to a $10.0 million term loan secured by plant, pipeline and equipment.  The interest rate swap was designed to minimize the effect of changes in the London InterBank Offered Rate ("LIBOR") rate.  We had designated the interest rate swap as a cash flow hedge under ASC Topic 815, Derivatives and Hedging. However, due to the ARC, we felt that the hedge was no longer entirely effective.  Due to the time required to make the determination and the immateriality of the hedge, we began treating it as ineffective as of October 1, 2014.

We assessed the fair value of the interest rate swap using a present value model that includes quoted LIBOR rates and the nonperformance risk of the Company and Bank of America based on the Credit Default Swap Market (Level 2 of fair value hierarchy).

We have consistently applied valuation techniques in all periods presented and believe we have obtained the most accurate information available for the types of derivative contracts we hold. The agreement terminated in December 2017; therefore, there was no outstanding liability at June 30, 2018, and December 31, 2017.  See discussion of our derivative instruments in Note 12.

12. DERIVATIVE INSTRUMENTS

Interest Rate Swap

On March 21, 2008, SHR entered into a pay-fixed, receive-variable interest rate swap agreement with Bank of America related to the $10.0 million (later increased to $14.0 million) term loan secured by plant, pipeline and equipment. The effective date of the interest rate swap agreement was August 15, 2008, and terminated on December 15, 2017.  We received credit for payments of variable rate interest made on the term loan at the loan's variable rates, which are based upon the LIBOR, and paid Bank of America an interest rate of 5.83% less the credit on the interest rate swap.  We originally designated the transaction as a cash flow hedge according to ASC Topic 815, Derivatives and Hedging.  Beginning on August 15, 2008, the derivative instrument was reported at fair value with any changes in fair value reported within other comprehensive income (loss) in the Company's Statement of Stockholders' Equity.  We entered into the interest rate swap to minimize the effect of changes in the LIBOR rate.


 
 
 
13
 




Due to the new debt agreements associated with the Acquisition, we believed that the hedge was no longer entirely effective.  Due to the time required to make the determination and the immateriality of the hedge, we began treating the interest rate swap as ineffective as of October 1, 2014.


13. STOCK-BASED COMPENSATION

Stock-based compensation of approximately $(219,000) and $656,000 during the three months and $372,000 and $1,289,000 during the six months ended June 30, 2018, and 2017, respectively, was recognized.

Restricted Stock Awards

On January 17, 2018, we awarded 251 shares of restricted stock to an officer at a grant date price of $13.85.  The stock was immediately vested.  Compensation expense recognized during the three months ended June 30, 2018, was $0 and for the six months ended June 30, 2018, was $5,000.

Restricted Stock Unit Awards

On February 20, 2018, we awarded approximately 102,000 shares of restricted stock units to officers at a grant date price of $12.15.  One-half of the restricted stock units vest ratably over three years.  The other half vests at the end of three years based upon the performance metrics of return on invested capital and earnings per share growth.  The number of shares actually granted will be adjusted based upon relative performance to our peers.  Compensation expense recognized during the three months ended June 30, 2018, was approximately $108,000 and for the six months ended June 30, 2018, was $144,000.

Officer compensation of approximately $95,000 and $40,000 during the three months and $207,000 and $40,000 during the six months ended June 30, 2018, and 2017, respectively, was recognized related to restricted stock unit awards granted to officers vesting through 2020.

Director compensation of approximately $81,000 and $75,000 during the three months and $165,000 and $156,000 during the six months ended June 30, 2018, and 2017, respectively, was recognized related to restricted stock unit awards granted to directors vesting through 2020.

Officer compensation of approximately $79,000 and $106,000 was recognized during the three months and $176,000 and $211,000 during the six months ended June 30, 2018, and 2017, respectively, related to restricted stock unit awards granted to officers.  One-half of the restricted stock units vest ratably over three years.  The other half vests at the end of the three years based upon the performance metrics of return on invested capital and earnings per share growth.  The number of shares actually granted will be adjusted based upon relative performance to our peers.

Employee compensation of approximately $98,000 and $108,000 during the three months and $202,000 and $215,000 during the six months ended June 30, 2018, and 2017, respectively, was recognized related to restricted stock units with a four years vesting period which was awarded to officers.  This restricted stock vests through 2019.

Restricted stock units activity in the first half of 2018 was as follows:
 
Shares of Restricted
Stock Units
 
Weighted Average Grant Date Price per Share
Outstanding at January 1, 2018
387,702

 
$
11.39

Granted
102,317

 
$
12.15

Forfeited
(48,631
)
 
$
10.88

Vested
(92,513
)
 
$
11.79

Outstanding at June 30, 2018
348,875

 
$
11.53







 
 
 
14
 









Stock Option and Warrant Awards

A summary of the status of our stock option awards and warrants is presented below:
 
Number of Stock Options & Warrants
 
Weighted Average Exercise Price per Share
 
Weighted Average Remaining Contractual Life
Outstanding at January 1, 2018
1,323,587

 
$
7.82

 
 
Granted

 

 
 
Exercised
(198,727
)
 
5.43

 
 
Cancelled
(200,000
)
 
3.40

 
 
Forfeited

 

 
 
Outstanding at June 30, 2018
924,860

 
$
9.29

 
4.7
Exercisable at June 30, 2018
924,860

 
$
9.29

 
4.7

The fair value of the options granted were calculated using the Black Scholes option valuation model with the assumptions as disclosed in prior quarterly and annual filings.

Directors' compensation of approximately $0 and $30,000 during the three months and $0 and $60,000 during the six months ended June 30, 2018, and 2017, respectively, was recognized related to options to purchase shares vesting through 2017.

Employee compensation of approximately $0 and $298,000 during the three months and $154,000 and $607,000 during the six months ended June 30, 2018, and 2017, respectively, was recognized related to options with a 4- year vesting period which were awarded to officers and key employees.  These options vest through 2018.

Post-retirement compensation of approximately $679,000 and $0 during the three months and $679,000 and $0 during the six months ended June 30, 2018, and 2017, was reversed related to options awarded to Mr. Hatem El Khalidi in July 2009.  On May 9, 2010, the Board of Directors determined that Mr. El Khalidi forfeited these options and other retirement benefits when he made various demands against the Company and other AMAK shareholders which would benefit him personally and were not in the best interests of the Company and its shareholders.  The Company was successful in litigating its right to withdraw the options and benefits and as such, these options and benefits were reversed during the second quarter of 2018.  See further discussion in Note 19.

See the Company's Annual Report on Form 10-K for the year ended December 31, 2017 for additional information.

14. SEGMENT INFORMATION

We operate through business segments according to the nature and economic characteristics of our products as well as the manner in which the information is used internally by our key decision maker, who is our Chief Executive Officer.  Segment data may include rounding differences.

Our specialty petrochemical segment includes SHR and GSPL.  Our specialty synthetic wax segment is TC.  We also separately identify our corporate overhead which includes financing and administrative activities such as legal, accounting, consulting, investor relations, officer and director compensation, corporate insurance, and other administrative costs.


 
 
 
15
 




 
Three Months Ended June 30, 2018
 
Petrochemical

 
Specialty Wax

 
Corporate

 
Eliminations

 
Consolidated

 
(in thousands)
Product sales
$
56,135

 
$
7,434

 
$

 
$

 
$
63,569

Processing fees
1,685

 
2,852

 

 

 
4,537

Total revenues
57,820

 
10,286

 

 

 
68,106

Operating profit (loss) before depreciation and amortization
6,095

 
1,164

 
(834
)
 

 
6,425

Operating profit (loss)
4,440

 
(201
)
 
(842
)
 

 
3,397

Profit (loss) before taxes
3,859

 
(506
)
 
(542
)
 

 
2,811

Depreciation and amortization
1,655

 
1,365

 
8

 

 
3,028

Capital expenditures
3,529

 
877

 

 

 
4,406

 
Three Months Ended June 30, 2017
 
Petrochemical

 
Specialty Wax

 
Corporate

 
Eliminations

 
Consolidated

 
(in thousands)
Product sales
$
50,508

 
$
6,508

 
$

 

 
$
57,016

Processing fees
2,071

 
3,028

 

 

 
5,099

Total revenues
52,579

 
9,536

 

 

 
62,115

Operating profit (loss) before depreciation and amortization
8,761

 
810

 
(1,841
)
 

 
7,730

Operating profit (loss)
7,217

 
(198
)
 
(1,857
)
 

 
5,162

Profit (loss) before taxes
6,598

 
(269
)
 
(5,165
)
 

 
1,164

Depreciation and amortization
1,544

 
1,008

 
16

 

 
2,568

Capital expenditures
9,021

 
4,931

 

 

 
13,952

 
Six Months Ended June 30, 2018
 
Petrochemical

 
Specialty Wax

 
Corporate

 
Eliminations

 
Consolidated

 
(in thousands)
Product sales
$
116,420

 
$
13,817

 
$

 
$
31

 
$
130,268

Processing fees
3,713

 
6,064

 

 
(198
)
 
9,579

Total revenues
120,133

 
19,881

 

 
(167
)
 
139,847

Operating profit (loss) before depreciation and amortization
14,488

 
1,554

 
(2,982
)
 

 
13,060

Operating profit (loss)
11,119

 
(1,115
)
 
(2,998
)
 

 
7,006

Profit (loss) before taxes
9,913

 
(1,687
)
 
(2,473
)
 

 
5,753

Depreciation and amortization
3,369

 
2,669

 
16

 

 
6,054

Capital expenditures
13,812

 
1,622

 

 

 
15,434



 
 
 
16
 




 
Six Months Ended June 30, 2017
 
Petrochemical

 
Specialty Wax

 
Corporate

 
Eliminations

 
Consolidated

 
(in thousands)
Product sales
$
94,899

 
$
13,016

 
$

 

 
$
107,915

Processing fees
3,559

 
6,183

 

 

 
9,742

Total revenues
98,458

 
19,199

 

 

 
117,657

Operating profit (loss) before depreciation and amortization
16,975

 
1,555

 
(4,020
)
 

 
14,510

Operating profit (loss)
13,875

 
(469
)
 
(4,052
)
 

 
9,354

Profit (loss) before taxes
12,601

 
(559
)
 
(8,330
)
 

 
3,712

Depreciation and amortization
3,100

 
2,024

 
32

 

 
5,156

Capital expenditures
17,777

 
10,056

 

 

 
27,833

 
June 30, 2018
 
Petrochemical

 
Specialty Wax

 
Corporate

 
Eliminations

 
Consolidated

 
(in thousands)
Trade receivables, product sales
$
20,377

 
$
3,639

 
$

 
$

 
$
24,016

Trade receivables, processing fees
671

 
1,780

 

 

 
2,451

Goodwill and intangible assets, net

 
41,675

 

 

 
41,675

Total assets
279,161

 
115,696

 
92,857

 
(154,086
)
 
333,628

 
December 31, 2017
 
Petrochemical

 
Specialty Wax

 
Corporate

 
Eliminations

 
Consolidated

 
(in thousands)
Trade receivables, product sales
$
20,211

 
$
2,671

 
$

 
$

 
$
22.882

Trade receivables, processing fees
983

 
1,914

 

 

 
2,897

Goodwill and intangible assets, net

 
42,606

 

 

 
42,606

Total assets
265,213

 
117,579

 
97,880

 
(153,346
)
 
327,326


15. INCOME TAXES

We file an income tax return in the U.S. federal jurisdiction and a margin tax return in Texas. We received notification from the Internal Revenue Service ("IRS") in November 2016 that the December 31, 2014, tax return was selected for audit.  In April 2017 the audit was expanded to include the year ended December 31, 2015, to review the refund claim related to research and development activities.  We received notification from the IRS in March 2018 that audit was complete and acceptance of the refund claims resulting from the R&D credit for approximately $350,000, which has now been received.  We also received notification that Texas will audit our R&D credit calculations for 2014 and 2015.  We are in the process of submitting additional documentation to Texas.  We do not expect any changes related to the Texas audit.  Tax returns for various jurisdictions remain open for examination for the years 2014 through 2017.  As of June 30, 2018 and December 31, 2017, respectively, we recognized no adjustment for uncertain tax positions or related interest and penalties.

The effective tax rate varies from the federal statutory rate of 21% primarily as a result of state tax expense and stock based compensation for the three and six months ended June 30, 2018.  The effective tax rate varies from the federal statutory rate of 35% primarily as a result of state tax expense and stock option based compensation offset by the manufacturing deduction for the three and six months ended June 30, 2017.  We continue to maintain a valuation allowance against certain deferred tax assets where realization is not certain.

On December 22, 2017, Public Law No. 115-97 known as the TCJA was enacted. The TCJA includes a number of changes to existing U.S. tax laws that impact the Company, most notably a reduction of the U.S. federal corporate income tax rate from a maximum of 35% to a flat 21% for tax years effective January 1, 2018. The TCJA also implements a territorial tax system, provides for a one-time deemed repatriation tax on unrepatriated foreign earnings, eliminates the alternative minimum tax (AMT), makes AMT credit carryforwards refundable, and permits the acceleration of depreciation for certain assets placed into service after September 27, 2017. In addition, the TJCA creates prospective changes beginning in 2018, including repeal of the domestic

 
 
 
17
 




manufacturing deduction, acceleration of tax revenue recognition, capitalization of research and development expenditures, additional limitations on executive compensation and limitations on the deductibility of interest.

We have elected to recognize the income tax effects of the TCJA in our financial statements in accordance with Staff Accounting Bulletin 118 (SAB 118), which provides guidance for the application of ASC Topic 740  Income Taxes, in the reporting period in which the TCJA was signed into law. Under SAB 118 when a Company does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the TCJA, it will recognize provisional amounts if a reasonable estimate can be made. If a reasonable estimate cannot be made, then no impact is recognized for the effect of the TCJA. SAB 118 permits an up to one year measurement period to finalize the measurement of the impact of the TCJA.

We have recognized the provisional tax impacts related to the acceleration of depreciation and included these amounts in our consolidated financial statements for the three and six months ended June 30, 2018. The ultimate impact may differ from these provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the we have made, additional regulatory guidance that may be issued, and actions we may take as a result of the TCJA . We did not identify items for which the income tax effects of the TCJA have not been completed, and a reasonable estimate could not be determined as of June 30, 2018, and December 31, 2017, except for changes in estimates that can result from finalizing the filing of the 2017 U.S. income tax return, which are not anticipated to be material.

16. POST-RETIREMENT OBLIGATIONS

In January 2008 an amended retirement agreement was entered into with Mr. Hatem El Khalidi; however, on May 9, 2010, the Board of Directors terminated the agreement due to actions of Mr. El Khalidi.  See Notes 13 and 19.  All amounts which had not met termination dates remained recorded until a resolution was achieved. The matter was resolved on May 25, 2018 and as of June 30, 2018, post-retirement obligations of approximately $1.0 million for Mr. El Khalidi have been reversed. As of December 31, 2017, approximately 1.0 million remained outstanding and was included in post-retirement benefits.

In July 2015 we entered into a retirement agreement with former CEO, Nicholas Carter.  As of June 30, 2018 and December 31, 2017, approximately $0.2 million and $0.3 million, respectively, remained outstanding and was included in post-retirement obligations.

In June 2018 we entered into a retirement agreement with former VP, Accounting & Compliance, Connie Cook. As of June 30, 2018, approximately $0.2 million remained outstanding and was included in post-retirement obligations.

See the Company's Annual Report on Form 10-K for the year ended December 31, 2017 for additional information.

17. INVESTMENT IN AMAK

In first quarter 2018, we completed an exchange of shares with certain shareholders whereby such shareholders traded 65,000 common shares of TREC in exchange for 24,489 shares of our AMAK stock.  The 65,000 shares were accounted for as treasury stock.  This transaction reduced our ownership percentage from 33.44% to 33.41%.

As of June 30, 2018, and December 31, 2017, the Company had a non-controlling equity interest of 33.4% in AMAK of approximately $45.5 million and $45.1 million, respectively. This investment is accounted for under the equity method. There were no events or changes in circumstances that may have an adverse effect on the fair value of our investment in AMAK at June 30, 2018.

AMAK's financial statements were prepared in the functional currency of AMAK which is the Saudi Riyal ("SR").  In June 1986 the SR was officially pegged to the U. S. Dollar ("USD") at a fixed exchange rate of 1 USD to 3.75 SR.

The summarized results of operation and financial position for AMAK are as follows:








 
 
 
18
 





Results of Operations
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018

 
2017

 
2018

 
2017

 
 
(thousands of dollars)
 
(thousands of dollars)
Sales
 
$
19,494

 
$

 
$
33,581

 
$
2,256

Cost of sales
 
16,555

 
8,901

 
29,061

 
12,463

Gross profit (loss)
 
$
2,939

 
$
(8,901
)
 
$
4,520

 
$
(10,207
)
General, administrative and other expenses
 
3,265

 
1,971

 
5,166

 
4,559

Net Loss
 
$
(326
)
 
$
(10,872
)
 
$
(646
)
 
$
(14,766
)
Depreciation and amortization
 
8,281

 
7,609

 
15,982

 
10,664

Net income (loss) before depreciation and amortization
 
$
7,955

 
$
(3,263
)
 
$
15,336

 
$
(4,102
)


Financial Position
 
 
June 30,

 
December 31,

 
 
2018

 
2017

 
 
(thousands of dollars)
Current assets
 
$
33,273

 
$
23,333

Noncurrent assets
 
228,733

 
237,875

Total assets
 
$
262,006

 
$
261,208

 
 
 
 
 
Current liabilities
 
$
22,873

 
$
24,439

Long term liabilities
 
71,520

 
68,837

Shareholders' equity
 
167,613

 
167,932

 
 
$
262,006

 
$
261,208


The equity in the income or loss of AMAK reflected on the consolidated statements of income for the three months and six months ended June 30, 2018, and 2017, is comprised of the following:

 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2018

 
2017

 
2018