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 March 31, 2019
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
trecoralogoa02.jpg
TRECORA RESOURCES
(Exact name of registrant as specified in its charter)

DELAWARE
75-1256622
(State or other jurisdiction of
(I.R.S. Employer Identification No.)
incorporation or organization)
 
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 every Interactive Data File required to be submitted 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 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         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   

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.10 per share
TREC
New York Stock Exchange

Number of shares of the Registrant's Common Stock (par value $0.10 per share), outstanding at April 30, 2019: 24,686,830.




TABLE OF CONTENTS

Item Number and Description
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 





PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.
TRECORA RESOURCES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
 
March 31,
2019
(Unaudited)
 
December 31,
2018
ASSETS
 
(thousands of dollars, except par value)
  Current Assets
 
 
 
 
Cash
 
$
6,833

 
$
6,735

Trade receivables, net
 
25,737

 
27,112

Inventories
 
16,922

 
16,539

Prepaid expenses and other assets
 
4,535

 
4,664

Taxes receivable
 
182

 
182

Total current assets
 
54,209

 
55,232

 
 
 
 
 
  Plant, pipeline and equipment, net
 
192,855

 
194,657

 
 
 
 
 
Goodwill
 
21,798

 
21,798

Intangible assets, net
 
18,482

 
18,947

Investment in AMAK
 
37,357

 
38,746

Lease right of use assets, net
 
16,137

 
—

Mineral properties in the United States
 
558

 
588

 
 
 
 
 
TOTAL ASSETS
 
$
341,396

 
$
329,968

LIABILITIES
 
 
 
 
Current Liabilities
 
 
 
 
Accounts payable
 
$
11,551

 
$
19,106

Accrued liabilities
 
5,053

 
5,439

Current portion of long-term debt
 
4,194

 
4,194

Current portion of lease liabilities
 
3,568

 
—

Current portion of other liabilities
 
890

 
752

Total current liabilities
 
25,256

 
29,491

 
 
 
 
 
  Long-term debt, net of current portion
 
99,240

 
98,288

Lease liabilities, net of current portion
 
12,566

 
—

  Other liabilities, net of current portion
 
1,108

 
1,352

Deferred income taxes
 
16,037

 
15,676

Total liabilities
 
154,207

 
144,807

 
 
 
 
 
EQUITY
 
 
 
 
Common stock‑authorized 40 million shares of $0.10 par value; issued 24.7 million and 24.6 million in 2019 and 2018 and outstanding 24.7 million and 24.6 million shares in 2019 and 2018, respectively
 
2,469

 
2,463

Additional paid-in capital
 
58,565

 
58,294

Common stock in treasury, at cost
 
(8
)
 
(8
)
Retained earnings
 
125,874

 
124,123

Total Trecora Resources Stockholders' Equity
 
186,900

 
184,872

Noncontrolling Interest
 
289

 
289

Total equity
 
187,189

 
185,161

 
 
 
 
 
TOTAL LIABILITIES AND EQUITY
 
$
341,396

 
$
329,968


See notes to consolidated financial statements.

 
 
 
1
 



TRECORA RESOURCES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
 
 
THREE MONTHS ENDED
MARCH 31,
 
 
2019
 
2018
 
 
(thousands of dollars, except per share amounts)
REVENUES
 
 
 
 
Specialty Petrochemical and Product Sales
 
$
61,493

 
$
66,699

Processing Fees
 
3,662

 
5,042

 
 
65,155

 
71,741

 
 
 
 
 
OPERATING COSTS AND EXPENSES
 
 
 
 
Cost of Sales and Processing
 
 
 
 
(including depreciation and amortization of $4,229 and $2,830, respectively)
 
55,082

 
61,601

 
 
 
 
 
    GROSS PROFIT
 
10,073

 
10,140

 
 
 
 
 
GENERAL AND ADMINISTRATIVE EXPENSES
 
 
 
 
General and Administrative
 
6,050

 
6,335

Depreciation
 
213

 
196

 
 
6,263

 
6,531

 
 
 
 
 
OPERATING INCOME
 
3,810

 
3,609

 
 
 
 
 
OTHER INCOME (EXPENSE)
 
 
 
 
Interest Income
 
5

 
7

Interest Expense
 
(1,499
)
 
(878
)
Equity in Earnings (Losses) of AMAK
 
(59
)
 
230

Miscellaneous Expense
 
(28
)
 
(26
)
 
 
(1,581
)
 
(667
)
 
 
 
 
 
INCOME BEFORE INCOME TAXES
 
2,229

 
2,942

 
 
 
 
 
INCOME TAX EXPENSE
 
478

 
590

 
 
 
 
 
NET INCOME
 
1,751

 
2,352

 
 
 
 
 
NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST
 
—

 
—

 
 
 
 
 
NET INCOME ATTRIBUTABLE TO TRECORA RESOURCES
 
$
1,751

 
$
2,352

 
 
 
 
 
Basic Earnings per Common Share
 
 
 
 
Net Income Attributable to Trecora Resources (dollars)
 
$
0.07

 
$
0.10

 
 
 
 
 
Basic Weighted Average Number of Common Shares Outstanding
 
24,653

 
24,343

 
 
 
 
 
Diluted Earnings per Common Share
 
 
 
 
Net Income Attributable to Trecora Resources (dollars)
 
$
0.07

 
$
0.09

 
 
 
 
 
Diluted Weighted Average Number of Common Shares Outstanding
 
25,027

 
25,231


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, 2019
 
24,626

 
$
2,463

 
$
58,294

 
$
(8
)
 
$
124,123

 
$
184,872

 
$
289

 
$
185,161

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Restricted Stock Units
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Issued to Directors
 
—

 
—

 
22

 
—

 
—

 
22

 
—

 
22

Issued to Employees
 
—

 
—

 
249

 
—

 
—

 
249

 
—

 
249

Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Issued to Directors
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Issued to Employees
 
61

 
6

 
—

 
—

 
—

 
6

 
—

 
6

Net Income
 
—

 
—

 
—

 
—

 
1,751

 
1,751

 
—

 
1,751

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2019
 
24,687

 
$
2,469

 
$
58,565

 
$
(8
)
 
$
125,874

 
$
186,900

 
$
289

 
$
187,189


See notes to consolidated financial statements.


 
 
 
3
 



TRECORA RESOURCES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
 
THREE MONTHS ENDED
MARCH 31,
 
 
2019
 
2018
 
 
(thousands of dollars)
OPERATING ACTIVITIES
 
 
 
 
Net Income
 
$
1,751

 
$
2,352

Adjustments to Reconcile Net Income
 
 
 
 
To Net Cash Provided by Operating Activities:
 
 
 
 
Depreciation and Amortization
 
3,977

 
2,561

Amortization of Intangible Assets
 
465

 
465

Stock-based Compensation
 
213

 
592

Deferred Income Taxes
 
361

 
428

Postretirement Obligation
 
(5
)
 
(3
)
Equity in Losses (Earnings) of AMAK
 
59

 
(230
)
Bad Debt Expense
 
—

 
128

Amortization of Loan Fees
 
45

 
93

Changes in Operating Assets and Liabilities:
 
 
 
 
Decrease (Increase) in Trade Receivables
 
1,375

 
(1,770
)
Decrease (Increase) in Insurance Receivables
 
—

 
(742
)
Decrease in Taxes Receivable
 
—

 
102

(Increase) Decrease in Inventories
 
(383
)
 
2,759

Increase in Prepaid Expenses and Other Assets
 
(227
)
 
(803
)
Decrease in Accounts Payable and Accrued Liabilities
 
(6,773
)
 
(3,190
)
Decrease in Other Liabilities
 
(34
)
 
(7
)
Net Cash Provided by Operating Activities
 
824

 
2,735

 
 
 
 
 
INVESTING ACTIVITIES
 
 
 
 
Additions to Plant, Pipeline and Equipment
 
(1,887
)
 
(11,028
)
Proceeds from PEVM
 
30

 
—

Advances to AMAK, net
 
—

 
(44
)
Proceeds from AMAK Share Repurchase
 
440

 
—

Net Cash Used in Investing Activities
 
(1,417
)
 
(11,072
)
 
 
 
 
 
FINANCING ACTIVITIES
 
 
 
 
Net Cash Paid Related to Stock-Based Compensation
 
(215
)
 
(40
)
Addition to Long-Term Debt
 
2,000

 
10,000

Repayment of Long-Term Debt
 
(1,094
)
 
(2,083
)
Net Cash Provided by Financing Activities
 
691

 
7,877

 
 
 
 
 
NET INCREASE (DECREASE) IN CASH
 
98

 
(460
)
 
 
 
 
 
CASH AT BEGINNING OF PERIOD
 
6,735

 
3,028

 
 
 
 
 
CASH AT END OF PERIOD
 
$
6,833

 
$
2,568

Supplemental disclosure of cash flow information:
 
 
Cash payments for interest
 
$
1,210

 
$
1,124

Cash payments for taxes, net of refunds
 
$
—

 
$
—

Supplemental disclosure of non-cash items:
 
 
 
 
Capital expansion amortized to depreciation expense
 
$
68

 
$
210

Foreign taxes paid by AMAK
 
$
891

 
$
—

Stock exchange (Note 16)
 
$
—

 
$
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 specialty 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. – Specialty petrochemical segment and parent of GSPL
(4)
GSPL – Gulf State Pipe Line Co, Inc. – Pipeline support for the specialty 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, 2018.

The unaudited condensed financial statements included in this document have been prepared on the same basis as the annual 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 three months ended March 31, 2019 are not necessarily indicative of results for the year ending December 31, 2019.

We currently operate in two segments, specialty petrochemical products and specialty waxes. All revenue originates from sources in the United States, 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 16.

Accounting Standards Adopted in 2019

In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-02, Leases (Topic 842), as amended by ASU 2017-13, 2018-01, 2018-10, 2018-11, and 2019-01, in order to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under prior GAAP and disclosing key information about leasing arrangements. The new standard requires that a lessee should recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term on the balance sheet. The Company adopted ASC 842 in the first quarter of 2019 utilizing the modified retrospective transition approach. The Company has elected (1) the package of practical expedients, which permits it not to r

 
 
 
5
 



eassess under the new standard its prior conclusions about lease identification, lease classification, and initial direct costs for any existing leases as of the adoption date, and (2) the hindsight practical expedient when determining lease term and assessing impairment of right-of-use assets. In addition, the Company elected the practical expedients related to (1) certain classes of underlying asset to not separate non-lease components from lease components and (2) the short-term lease recognition exemption for all leases that qualify. The adoption of ASC 842 on January 1, 2019 resulted in the recognition of right-of-use assets of approximately $17.0 million and lease liabilities for operating leases of approximately $17.0 million on its Consolidated Balance Sheets, with no material impact to retained earnings or Consolidated Statements of Operations. See Note 8 for further information regarding the impact of the adoption of ASC 842 on the Company's consolidated financial statements.

 
 
 
6
 



2. RECENT ACCOUNTING PRONOUNCEMENTS

In January 2017, the FASB issued ASU No. 2017-4, Intangibles - Goodwill and Other (Topic 350). The amendments in ASU 2017-4 simplify the measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Instead, under these amendments, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss should not exceed the total amount of goodwill allocated to that reporting unit. The amendments are effective for public business entities for the first interim and annual reporting periods beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The Company has goodwill from a prior business combination and performs an annual impairment test or more frequently if changes or circumstances occur that would more-likely-than-not reduce the fair value of the reporting unit below its carrying value. During the year ended December 31, 2018, the Company performed its impairment assessment and determined the fair value of the aggregated reporting units exceed the carrying value, such that the Company's goodwill was not considered impaired. Although the Company cannot anticipate future goodwill impairment assessments, based on the most recent assessment, it is unlikely that an impairment amount would need to be calculated and, therefore, the Company does not anticipate a material impact from these amendments to the Company's financial position and results of operations. The current accounting policies and processes are not anticipated to change, except for the elimination of the Step 2 analysis.

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 Company adopted this ASU on January 1, 2019 and it did not have a material effect on the Company’s consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820) - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which is designed to improve the effectiveness of disclosures by removing, modifying and adding disclosures related to fair value measurements. ASU No. 2018-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and the ASU allows for early adoption in any interim period after issuance of the update. The adoption of this ASU is not expected to have a significant impact on the Company’s consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), to require the measurement of expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable forecasts and applies to all financial assets, including trade receivables. The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. ASU No. 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and the ASU allows for early adoption as of the beginning of an interim or annual reporting period beginning after December 15, 2018. The Company is currently assessing the impact this ASU will have on its consolidated financial statements.

3. TRADE RECEIVABLES

Trade receivables, net, consisted of the following:
 
 
March 31, 2019

 
December 31, 2018

 
 
(thousands of dollars)
Trade receivables
 
$
26,189

 
$
27,564

Less allowance for doubtful accounts
 
(452
)
 
(452
)
Trade receivables, net
 
$
25,737

 
$
27,112


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

4. PREPAID EXPENSES AND OTHER ASSETS


 
 
 
7
 



Prepaid expenses and other assets consisted of the following:
 
 
March 31, 2019

 
December 31, 2018

 
 
(thousands of dollars)
Prepaid license
 
$
1,814

 
$
2,419

Spare parts
 
1,621

 
1,597

Other prepaid expenses and assets
 
1,100

 
648

Total
 
$
4,535

 
$
4,664


5. INVENTORIES

Inventories included the following:
 
 
March 31, 2019

 
December 31, 2018

 
 
(thousands of dollars)
Raw material
 
$
4,384

 
$
4,742

Work in process
 
137

 
173

Finished products
 
12,401

 
11,624

Total inventory
 
$
16,922

 
$
16,539


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

Inventory included specialty petrochemical products in transit valued at approximately $4.1 million and $4.1 million at March 31, 2019, and December 31, 2018, respectively.


6. PLANT, PIPELINE AND EQUIPMENT

Plant, pipeline and equipment consisted of the following:
 
 
March 31, 2019

 
December 31, 2018

 
 
(thousands of dollars)
Platinum catalyst metal
 
$
1,580

 
$
1,612

Catalyst
 
3,396

 
3,131

Land
 
5,428

 
5,428

Plant, pipeline and equipment
 
255,567

 
253,905

Construction in progress
 
4,473

 
4,343

Total plant, pipeline and equipment
 
$
270,444

 
$
268,419

Less accumulated depreciation
 
(77,589
)
 
(73,762
)
Net plant, pipeline and equipment
 
$
192,855

 
$
194,657


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

Interest capitalized for construction was approximately $0 and $304,000 for the three months ended March 31, 2019 and 2018, respectively.

Labor capitalized for construction was approximately $0.1 million and $1.2 million for the three months ended March 31, 2019 and 2018, respectively.

Construction in progress during the first three months of 2019 included sales rack and Advanced Reformer unit improvements at SHR and equipment modifications at TC. Construction in progress during the first three 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.


 
 
 
8
 



Amortization relating to the catalyst, which is included in cost of sales, was approximately $221,000 and $0 for the three months ended March 31, 2019 and 2018, 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:
 
 
March 31, 2019
 
 
Gross
 
Accumulated
Amortization
 
Net
Intangible assets subject to amortization (Definite-lived)
 
(thousands of dollars)
Customer relationships
 
$
16,852

 
$
(5,055
)
 
$
11,797

Non-compete agreements
 
94

 
(85
)
 
9

Licenses and permits
 
1,471

 
(522
)
 
949

Developed technology
 
6,131

 
(2,759
)
 
3,372

 
 
24,548

 
(8,421
)
 
16,127

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

 
—

 
197

Trade name
 
2,158

 
—

 
2,158

Total
 
$
26,903

 
$
(8,421
)
 
$
18,482


 
 
December 31, 2018
 
 
Gross
 
Accumulated
Amortization
 
Net
Intangible assets subject to amortization (Definite-lived)
 
(thousands of dollars)
Customer relationships
 
$
16,852

 
$
(4,775
)
 
$
12,077

Non-compete agreements
 
94

 
(80
)
 
14

Licenses and permits
 
1,471

 
(495
)
 
976

Developed technology
 
6,131

 
(2,606
)
 
3,525

 
 
24,548

 
(7,956
)
 
16,592

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

 
—

 
197

Trade name
 
2,158

 
—

 
2,158

Total
 
$
26,903

 
$
(7,956
)
 
$
18,947


Amortization expense for intangible assets included in cost of sales for the three months ended March 31, 2019 and 2018, was approximately $465,000 and $465,000, respectively.

Based on identified intangible assets that are subject to amortization as of March 31, 2019, we expect future amortization expenses for each period to be as follows:

 
 
 
9
 



 
 
Total

 
Remainder of 2019

 
2020

 
2021

 
2022

 
2023

 
2024

 
Thereafter

 
 
(thousands of dollars)
Customer relationships
 
$
11,797

 
$
843

 
$
1,123

 
$
1,123

 
1,123

 
1,123

 
1,123

 
$
5,339

Non-compete agreements
 
9

 
9

 
—

 
—

 
—

 
—

 
—

 
—

Licenses and permits
 
949

 
79

 
106

 
101

 
86

 
86

 
86

 
405

Developed technology
 
3,372

 
460

 
613

 
613

 
613

 
613

 
460

 
—

Total future amortization expense
 
$
16,127

 
$
1,391

 
$
1,842

 
$
1,837

 
$
1,822

 
$
1,822

 
$
1,669

 
$
5,744


8. LEASES
The Company leases certain rail cars, rail equipment, office space and office equipment. The Company determines if a contract is a lease at the inception of the arrangement. The Company reviews all options to extend, terminate, or purchase its right of use assets at the inception of the lease and accounts for these options when they are reasonably certain of being exercised.

Leases with an initial term of 12 months or less are not recorded on the consolidated balance sheets. Lease expense for these leases is recognized on a straight-line basis over the lease term.
The components of lease expense were as follows:

($ in thousands)
Classification in the Condensed Consolidated Statements of Income
Three Months Ended March 31, 2019
Operating lease cost (a)
Cost of sales, exclusive of depreciation and amortization
$
1,139

Operating lease cost (a)
Selling, general and administrative
34

Total operating lease cost
 
$
1,173

 
 
 
Finance lease cost:
 
 
Amortization of right-of-use assets
Depreciation
$
—

Interest on lease liabilities
Interest Expense
—

Total finance lease cost
 
$
—

 
 
 
Total lease cost
 
$
1,173

 
 
 
(a) Short-term lease costs were approximately $40 thousand during the period.

The Company had no variable lease expense, as defined by ASC 842, during the period.


 
 
 
10
 



($ in thousands)
Classification on the Condensed Consolidated Balance Sheets
March 31, 2019
Assets:
 
 
Operating
Operating lease assets
$
16,137

Finance
Property, plant, and equipment
—

Total leased assets
 
$
16,137

 
 
 
Liabilities:
 
 
Current
 
 
Operating
Current portion of operating lease liabilities
$
3,568

Finance
Short-term debt and current portion of long-term debt
—

Noncurrent
 
 
Operating
Operating lease liabilities
12,566

Finance
Long-term debt
—

Total lease liabilities
 
$
16,134

($ in thousands)
Three Months Ended March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 
Operating cash flows used for operating leases
$
1,133

Operating cash flows used for finance leases
—

Financing cash flows used for finance leases
—

Right-of-use assets obtained in exchange for lease obligations:
 
Operating leases
$
113

Finance leases
—


 
As of March 31, 2019
Weighted-average remaining lease term (in years):
 
Operating leases
5.0

Finance leases
0.0

Weighted-average discount rate:
 
Operating leases
4.5
%
Finance leases
—
%
Nearly all of the Company’s lease contracts do not provide a readily determinable implicit rate. For these contracts, the Company’s estimated incremental borrowing rate is based on information available at the inception of the lease.
As of March 31, 2019, maturities of lease liabilities were as follows:

($ in thousands)
Operating Leases
Finance Leases
2020
$
4,202

$
—

2021
3,624

—

2022
3,486

—

2023
3,006

—

2024
1,885

—

Thereafter
1,787

—

Total lease payments
$
17,990

$
—

Less: Interest
1,856

—

Total lease obligations
$
16,134

$
—



 
 
 
11
 



Disclosures related to periods prior to adoption of ASU 2016-02
The Company adopted ASU 2016-02 using a modified retrospective transition approach on January 1, 2019 as noted in Note 1. As required, the following disclosure is provided for periods prior to adoption. Minimum lease commitments as of December 31, 2018 that have initial or remaining lease terms in excess of one year are as follows:

($ in thousands)
Operating Leases
2019
$
3,670

2020
3,583

2021
3,418

2022
3,107

2023
2,288

Beyond 2023
2,065


9. ACCRUED LIABILITIES

Accrued liabilities consisted of the following:
 
 
March 31, 2019

 
December 31, 2018

 
 
(thousands of dollars)
Accrued state taxes
 
$
189

 
$
210

Accrued property taxes
 
837

 
—

Accrued payroll
 
1,006

 
936

Accrued interest
 
32

 
31

Accrued officer compensation
 
300

 
—

Other
 
2,689

 
2,239

Total
 
$
5,053

 
$
5,439


10. LIABILITIES AND LONG-TERM DEBT

Senior Secured Credit Facilities

As of March 31, 2019, we had $20.0 million in borrowings outstanding under the revolving credit facility (the "Revolving Facility") of our amended and restated credit agreement (as amended to the date hereof, the "ARC Agreement") and approximately $84.2 million in borrowings outstanding under the term loan facility of the ARC Agreement (the "Term Loan Facility" and, together with the Revolving Facility, the "Credit Facilities"). In addition, we had approximately $25 million of available borrowings under our Revolving Facility at March 31, 2019. TOCCO’s ability to make additional borrowings under the Revolving Facility at March 31, 2019 was limited by, and in the future may be limited by our obligation to maintain compliance with the covenants contained in the ARC Agreement (including maintenance of a maximum Consolidated Leverage Ratio and minimum Consolidated Fixed Charge Coverage Ratio (each as defined in the ARC Agreement)).

On March 29, 2019, TOCCO, as borrower, and SHR, GSPL and TC, as guarantors, entered into a Sixth Amendment (“Sixth Amendment”) to the ARC Agreement. Pursuant to the Sixth Amendment, certain amendments were made to the terms of the ARC Agreement, including increasing the maximum Consolidated Leverage Ratio that must be maintained by TOCCO to 4.75 to 1.00 for the four fiscal quarters ended March 31, 2019, 4.50 to 1.00 for the four fiscal quarters ended June 30, 2019 and 4.00 to 1.00 for the four fiscal quarters ended September 30, 2019. For the four fiscal quarters ended December 31, 2019 and each fiscal quarter thereafter, TOCCO must maintain a Consolidated Leverage Ratio of 3.50 to 1.00 (subject to temporary increase following certain acquisitions).

The maturity date for the ARC Agreement is July 31, 2023. As of March 31, 2019, the effective interest rate for the Credit Facilities was 4.80%. The ARC Agreement contains a number of customary affirmative and negative covenants and we were in compliance with those covenants as of March 31, 2019.

For a summary of additional terms of the Credit Facilities, see Note 12, “Long-Term Debt and Long-Term Obligations” to the consolidated financial statements set forth in our Annual Report on Form 10-K for the year ended December 31, 2018.

 
 
 
12
 



Debt Issuance Costs

Debt issuance costs of approximately $0.9 million were incurred in connection with the fourth amendment to the ARC Agreement. Unamortized debt issuance costs of approximately $0.8 million and $0.8 million for the periods ended March 31, 2019 and December 31, 2018, have been netted against outstanding loan balances.

Long-term debt and long-term obligations are summarized as follows:
 
March 31, 2019
 
December 31, 2018
 
(thousands of dollars)
Revolving facility
20,000

 
18,000

Term loan facility
84,219

 
85,312

Loan fees
(785
)
 
(830
)
 
 
 
 
Total long-term debt
103,434


102,482

 
 
 
 
Less current portion including loan fees
4,194

 
4,194

 
 
 
 
Total long-term debt, less current portion including loan fees
99,240


98,288


11. STOCK-BASED COMPENSATION

The Stock Option Plan for Key Employees, as well as, the Non-Employee Director Stock Option Plan (hereinafter collectively referred to as the “Stock Option Plans”), were approved by the Company’s stockholders in July 2008. The Stock Option Plans allot for the issuance of up to 1,000,000 shares.

The Trecora Resources Stock and Incentive Plan (the “Plan”) was approved by the Company’s stockholders in June 2012. The Plan allots for the issuance of up to 1,500,000 shares in the form of stock options or restricted stock unit awards.

Share-based compensation of approximately $0.2 million and $0.6 million was recognized during the three months ended March 31, 2019 and 2018, respectively.

Stock Options and Warrant Awards

Stock options and warrants granted under the provisions of the Stock Option Plans permit the purchase of our common stock at exercise prices equal to the closing price of Company common stock on the date the options were granted. The options have terms of 10 years and generally vest ratably over terms of 4 to 5 years. There were no stock options or warrant awards issued during the three months ended March 31, 2019 or 2018.

A summary of the status of the Company’s stock option and warrant awards is as follows:

 
Stock Options and Warrants

 
Weighted
Average
Exercise
Price
Per Share

 
Weighted
Average
Remaining
Contractual
Life
 
Intrinsic
Value
(in thousands)

Outstanding at January 1, 2019
745,830

 
10.33
 
 
 
 
Granted
—

 
—

 
 
 
 
Exercised
(85,000
)
 
7.71
 
 
 
 
Forfeited
(108,830
)
 
8.80

 
 
 
 
Outstanding at March 31, 2019
552,000

 
11.04
 
3.8
 
$
—

Expected to vest
—

 
 
 
 
 
$
—

Exercisable at March 31, 2019
552,000

 
11.04
 
3.8
 
$
—


 
 
 
13
 




The aggregate intrinsic value of options was calculated as the difference between the exercise price of the underlying awards and the quoted price of our common stock. At March 31, 2019, options to purchase approximately 0.1 million shares of common stock were in-the-money.

Since no options were granted, the weighted average grant-date fair value per share of options granted during the three months ended March 31, 2019 and 2018 was $0. During the three months ended March 31, 2019 and 2018, the aggregate intrinsic value of options and warrants exercised was approximately $141,000 and $616,000 respectively, determined as of the date of option exercise.

The Company received no cash from the exercise of options during the three months ended March 31, 2019 and 2018. Of the 85,000 stock options exercised, the Company only issued approximately 11,000 shares due to cashless transactions. The tax benefit realized from the exercise was insignificant.

The Company has no non-vested options as of March 31, 2019.
Restricted Stock Unit Awards
Generally, restricted stock unit awards are granted annually to officers and directors of the Company under the provisions of the Plan. Restricted stock units are also granted ad hoc to attract or retain key personnel, and the terms and conditions under which these restricted stock units vest vary by award. The fair market value of restricted stock units granted is equal to the Company’s closing stock price on the date of grant. Restricted stock units granted generally vest ratably over periods ranging from 2.5 to 5 years. Certain awards also include vesting provisions based on performance metrics. Upon vesting, the restricted stock units are settled by issuing one share of Company common stock per unit.

A summary of the status of the Company's restricted stock units activity is as follows:
 
Shares of Restricted
Stock Units

 
Weighted Average Grant Date Price per Share
Outstanding at January 1, 2019
405,675

 
11.27
Granted
190,615

 
9.22
Forfeited
(58,268
)
 
12.15
Vested
(105,456
)
 
12.53
Outstanding at March 31, 2019
432,566

 
9.94
Expected to vest
432,566

 
 

12. 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. We also received notification that Texas will audit our R&D credit calculations for 2014 and 2015. We were notified by Texas that the audit has been temporarily suspended as the Comptroller's office reviews its audit process regarding R&D credits. 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 March 31, 2019 and December 31, 2018, 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, stock based compensation and a research and development credit for the three months ended March 31, 2019 and 2018. We continue to maintain a valuation allowance against certain deferred tax assets, specifically for mining claims for PEVM, where realization is not certain.

We did not identify items for which the income tax effects of the Tax Cut and Jobs Act ("TCJA") have not been completed, and a reasonable estimate could not be determined as of March 31, 2019 and December 31, 2018. The federal income tax

 
 
 
14
 



return for 2017 was filed in October 2018, which resulted in net operating tax loss and business credit which were carried back to 2015 and 2016 and the respective funds have been received.

13. 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 March 31, 2019 and 2018, respectively.

 
 
Three Months Ended
March 31, 2019
 
Three Months Ended
March 31, 2018
 
 
Income

 
Shares

 
Per Share
Amount

 
Income

 
Shares

 
Per Share
Amount

Basic Net Income per Share:
 
 
 
 
 
 
 
 
 
 
 
 
Net Income Attributable to Trecora Resources
 
$
1,751

 
24,653

 
$
0.07

 
$
2,352

 
24,343

 
$
0.10

Unvested restricted stock units
 
 
 
374

 
 
 
 
 
403

 
 
Dilutive stock options outstanding
 
 
 
—

 
 
 
 
 
485

 
 
Diluted Net Income per Share:
 
 
 
 
 
 
 
 
 
 
 
 
Net Income Attributable to Trecora Resources
 
$
1,751

 
25,027

 
$
0.07

 
$
2,352

 
25,231

 
$
0.09


At March 31, 2019 and 2018, 610,000 and 1,242,160 shares of common stock, respectively, were issuable upon the exercise of options and warrants.

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 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.

 
Three Months Ended March 31, 2019
 
Specialty Petrochemical

 
Specialty Wax

 
Corporate

 
Eliminations

 
Consolidated

 
(in thousands)
Product sales
$
55,490

 
$
6,003

 
$
—

 
$
—

 
$
61,493

Processing fees
1,383

 
2,279

 
—

 
—

 
3,662

Total revenues
56,873

 
8,282

 
—

 
—

 
65,155

Operating profit (loss) before depreciation and amortization
11,407

 
(849
)
 
(2,305
)
 
—

 
8,253

Operating profit (loss)
8,333

 
(2,197
)
 
(2,326
)
 
—

 
3,810

Profit (loss) before taxes
7,135

 
(2,539
)
 
(2,367
)
 
—

 
2,229

Depreciation and amortization
3,074

 
1,348

 
20

 
—

 
4,442

Capital expenditures
1,378

 
509

 
—

 
—

 
1,887


 
 
 
15
 



 
Three Months Ended March 31, 2018
 
Specialty Petrochemical

 
Specialty Wax

 
Corporate

 
Eliminations

 
Consolidated

 
(in thousands)
Product sales
$
60,285

 
$
6,383

 
$
—

 
31

 
$
66,699

Processing fees
2,028

 
3,212

 
—

 
(198
)
 
5,042

Total revenues
62,313

 
9,595

 
—

 
(167
)
 
71,741

Operating profit (loss) before depreciation and amortization
8,393

 
390

 
(2,148
)
 
—

 
6,635

Operating profit (loss)
6,679

 
(914
)
 
(2,156
)
 
—

 
3,609

Profit (loss) before taxes
6,054

 
(1,181
)
 
(1,931
)
 
—

 
2,942

Depreciation and amortization
1,714

 
1,304

 
8

 
—

 
3,026

Capital expenditures
10,283

 
745

 
—

 
—

 
11,028

 
March 31, 2019
 
Specialty Petrochemical

 
Specialty Wax

 
Corporate

 
Eliminations

 
Consolidated

 
(in thousands)
Trade receivables, product sales
$
19,938

 
$
3,279

 
$
—

 
$
—

 
$
23,217

Trade receivables, processing fees
684

 
1,836

 
—

 
—

 
2,520

Goodwill and intangible assets, net
—

 
40,280

 
—

 
—

 
40,280

Total assets
301,633

 
113,827

 
90,141

 
(164,205
)
 
341,396

 
December 31, 2018
 
Specialty Petrochemical

 
Specialty Wax

 
Corporate

 
Eliminations

 
Consolidated

 
(in thousands)
Trade receivables, product sales
$
21,915

 
$
3,173

 
$
—

 
$
—

 
$
25.088

Trade receivables, processing fees
633

 
1,391

 
—

 
—

 
2,024

Goodwill and intangible assets, net
—

 
40,745

 
—

 
—

 
40,745

Total assets
284,367

 
115,366

 
91,474

 
(161,239
)
 
329,968


15. POST-RETIREMENT OBLIGATIONS

We currently have post-retirement obligations with two former executives. As of March 31, 2019 and December 31, 2018, approximately $0.4 million and $0.4 million, respectively, remained outstanding and was included in post-retirement obligations.

For additional information, see Note 22, “Post–Retirement Obligations” to the consolidated financial statements set forth in our Annual Report on Form 10–K for the year ended December 31, 2018.

16. INVESTMENT IN AMAK

As of March 31, 2019 and December 31, 2018, the Company had a non-controlling equity interest of 33.4% in AMAK of approximately $37.4 million and $38.7 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 March 31, 2019.

In first quarter 2018, we completed an exchange of shares with certain stockholders whereby such stockholders 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%.

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.

 
 
 
16
 




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

Results of Operations
 
 
Three Months Ended March 31,
 
 
2019

 
2018

 
 
(thousands of dollars)
Sales
 
$
20,664

 
$
14,087

Cost of sales
 
18,570

 
12,506

Gross profit
 
2,094

 
1,581

Selling, general, and administrative
 
2,738

 
1,523

Operating income (loss)
 
(644
)
 
58

Other income
 
428

 
20

Finance and interest expense
 
(445
)
 
(397
)
Loss before Zakat and income taxes
 
(661
)
 
(319
)
Zakat and income taxes
 
522

 
—

Net Loss
 
$
(1,183
)
 
$
(319
)

Financial Position
 
 
March 31,

 
December 31,

 
 
2019

 
2018

 
 
(thousands of dollars)
Current assets
 
$
56,073

 
$
44,093

Noncurrent assets
 
202,640

 
212,291

Total assets
 
$
258,713

 
$
256,384

 
 
 
 
 
Current liabilities
 
$
18,030

 
$
17,160

Long term liabilities
 
80,008

 
77,366

Stockholders' equity
 
160,675

 
161,858

 
 
$
258,713

 
$
256,384


The equity in the earnings (losses) of AMAK reflected on the consolidated statements of income for the three months ended March 31, 2019, and 2018, is comprised of the following:
 
 
Three Months Ended
March 31,
 
 
2019

 
2018

 
 
(thousands of dollars)
AMAK Net Loss
 
$
(1,183
)
 
$
(319
)
Percentage of Ownership
 
33.41
%
 
33.41
%
 
 
 
 
 
Company's share of loss reported by AMAK
 
$
(395
)
 
$
(107
)
Amortization of difference between Company's investment in AMAK and Company's share of net assets of AMAK
 
337

 
337

Equity in earnings (losses) of AMAK
 
$
(59
)
 
$
230


In connection with the 2018 AMAK share repurchase program, we received net proceeds of approximately $0.4 million during the three months ended March 31, 2019. AMAK expects to complete the share repurchase program in 2019, at which

 
 
 
17
 



point all shares repurchased from AMAK stockholders will be registered as treasury shares. Upon completion of the share repurchase program, the Company does not believe its ownership percentage in AMAK will change from 33.4%.

For additional information, see Note 10, “Investment in Al Masane Al Kobra Mining Company ("AMAK")” to the consolidated financial statements set forth in our Annual Report on Form 10–K for the year ended December 31, 2018.

At March 31, 2019, and December 31, 2018, we had a receivable from AMAK of approximately $54,000 and $67,000, respectively, relating to unreimbursed travel and Board expenses which are included in prepaid and other assets. We did not advance any cash to AMAK during 2019.

17. RELATED PARTY TRANSACTIONS

Consulting fees of approximately $22,000 and $31,000 were incurred during the three months ended March 31, 2019 and 2018, respectively, from our Director, Nicholas Carter. Due to his history and experience with the Company and to provide continuity after his retirement, a three year consulting agreement was entered into with Mr. Carter in July 2015. In March 2019, a new consulting agreement was entered into with Mr. Carter effective through December 31, 2019, unless otherwise agreed by the Company and Mr. Carter.

18. COMMITMENTS AND CONTINGENCIES

Guarantees

On October 24, 2010, we executed a limited Guarantee in favor of the Saudi Industrial Development Fund ("SIDF") whereby we agreed to guaranty up to 41% of the SIDF loan to AMAK in the principal amount of 330.0 million Saudi Riyals (US$88.0 million) (the "Loan"). The term of the loan was originally through June 2019. As a condition of the Loan, SIDF required all stockholders of AMAK to execute personal or corporate Guarantees; as a result, our guarantee is for approximately 135.3 million Saudi Riyals (US$36.1 million). The loan was necessary to continue construction of the AMAK facilities and provide working capital needs. We received no consideration in connection with extending the guarantee and did so to maintain and enhance the value of its investment. On July 8, 2018, the SIDF loan was amended to adjust the repayment schedule and extend the repayment terms through April 2024. Under the new payment terms the current amount due to SIDF in 2019 is $8,000,000. The total amount outstanding to the SIDF at March 31, 2019, was 305.0 million Saudi Riyals (US$81.3 million).

Operating Lease Commitments

See Note 8 for discussion on lease commitments.

Litigation

The Company is periodically named in legal actions arising from normal business activities. We evaluate the merits of these actions and, if we determine that an unfavorable outcome is probable and can be reasonably estimated, we will establish the necessary reserves. We are not currently involved in legal proceedings that could reasonably be expected to have a material adverse effect on our business, prospects, financial condition or results of operations. We may become involved in material legal proceedings in the future.

Supplier Agreements

From time to time, we may incur shortfall fees due to feedstock purchases being below the minimum amounts prescribed by our agreements with our suppliers. Shortfall fee expenses for the three months ended March 31, 2019, and 2018, were $0.1 million and $0.1 million, respectively.

Environmental Remediation

Amounts charged to expense for various activities related to environmental monitoring, compliance, and improvements were approximately $198,000 and $149,000 for the three months ended March 31, 2019, and 2018, respectively.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.


 
 
 
18
 



FORWARD LOOKING AND CAUTIONARY STATEMENTS

Some of the statements and information contained in this Quarterly Report on Form 10-Q may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements regarding the Company's financial position, business strategy and plans and objectives of the Company's management for future operations and other statements that are not historical facts, are forward-looking statements. Forward-looking statements are often characterized by the use of words such as "outlook," "may," "will," "should," "could," "expects," "plans," "anticipates," "contemplates," "proposes," "believes," "estimates," "predicts," "projects," "potential," "continue," "intend," or the negative of such terms and other comparable terminology, or by discussions of strategy, plans or intentions.

Forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those expressed or implied by such statements. Such risks, uncertainties and factors include, but are not limited to: general economic conditions domestically and internationally; insufficient cash flows from operating activities; difficulties in obtaining financing; outstanding debt and other financial and legal obligations; lawsuits; competition; industry cycles; feedstock, product and mineral prices; feedstock availability; technological developments; regulatory changes; environmental matters; foreign government instability; foreign legal and political concepts; foreign currency fluctuations; and other risks detailed in this report, in our latest Annual Report on Form 10–K, including but not limited to Part I, Item 1A. Risk Factors and Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations therein, and in our other filings with the SEC.
There may be other factors of which we are currently unaware or deem immaterial that may cause our actual results to differ materially from the forward-looking statements. In addition, to the extent any inconsistency or conflict exists between the information included in this report and the information included in our prior reports and other filings with the SEC, the information contained in this report updates and supersedes such information.
Forward-looking statements are based on current plans, estimates, assumptions and projections, and, therefore, you should not place undue reliance on them. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update them in light of new information or future events.

Overview

The following discussion and analysis of our financial results, as well as the accompanying unaudited consolidated financial statements and related notes to consolidated financial statements to which they refer, are the responsibility of our management. Our accounting and financial reporting fairly reflect our business model which is based on the manufacturing and marketing of specialty petrochemical products and waxes and providing customer manufacturing services.

The discussion and analysis of financial condition and the results of operations which appears below should be read in conjunction with the Management's Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements which appear in our Annual Report on Form 10-K for the year ended December 31, 2018.

Our preferred supplier position into the specialty petrochemicals market is derived from the combination of our reputation as a reliable supplier established over many years, the very high purity of our products, and a focused approach to customer service. In specialty waxes, we are able to deliver to our customers a performance and price point that is unique to our market; while the diversity of our custom processing assets and capabilities offers solutions to our customers not common along the U.S. Gulf Coast.

Enabling our success in these businesses is a commitment to operational excellence which establishes a culture that puts the safety of our employees and communities in which we operate, the integrity of our assets and regulatory compliance as the priority. This commitment drives a change to an emphasis on forward-looking, leading-indicators of our results and proactive steps to continuously improve our performance. We bring the same commitment to excellence to our commercial activities where we focus on the value proposition to our customers while understanding opportunities to maximize our value capture through service and product differentiation, supply chain and operating cost efficiencies and diversified supply options. We believe over time our focus on execution, meeting the needs of our customers and the prudent control of our costs will create value for our shareholders.

Review of First Quarter 2019 Results


 
 
 
19
 



We reported first quarter 2019 profit of $1.8 million down from $2.4 million earnings in first quarter 2018. Diluted earnings per share of $0.07 were reported for 2019, down from $0.09 in 2018. Sales volume of our specialty petrochemical products decreased 3.5%, and sales revenue from our specialty petrochemical products decreased 8.0% as compared to first quarter 2018. Prime product specialty petrochemical sales volumes (which exclude by-product sales) were flat compared to first quarter 2018. Specialty wax sales volume declined 17.4% compared to first quarter 2018 and specialty wax sales revenue was down 6.0% compared to first quarter 2018. Consolidated gross profit margin increased to 15.5% of sales in first quarter 2019 from 14.1% in first quarter 2018.

Non-GAAP Financial Measures

We include in this Quarterly Report on Form 10-Q the non-GAAP financial measures of EBITDA, Adjusted EBITDA and Adjusted Net Income and provide reconciliations from our most directly comparable GAAP financial measures to those measures.

We believe these financial measures provide users of our financial statements with supplemental information that may be useful in evaluating our operating performance. We also believe that such non–GAAP measures, when read in conjunction with our operating results presented under GAAP, can be used to better assess our performance from period to period and relative to performance of other companies in our industry, without regard to financing methods, historical cost basis or capital structure. These measures are not measures of financial performance or liquidity under GAAP and should be considered in addition to, and not as a substitute for, analysis of our results under GAAP.

EBITDA and Adjusted EBITDA: We define EBITDA as net income plus interest expense including derivative gains and losses, income taxes, depreciation and amortization. We define Adjusted EBITDA as EBITDA plus stock-based compensation, plus restructuring and severance expenses, plus losses on extinguishment of debt, plus or minus equity in AMAK's earnings and losses or gains from equity issuances, and plus or minus gains or losses on acquisitions.

Adjusted Net Income: We define Adjusted Net Income as net income plus or minus tax effected equity in AMAK's earnings and losses, minus tax effected restructuring and severance expenses, and adjustments for tax law changes.
The following table presents a reconciliation of net income (loss), our most directly comparable GAAP financial performance measure for each of the periods presented, to EBITDA, Adjusted EBITDA, and Adjusted Net Income.
 
 
Three Months Ended
March 31,
 
 
2019

 
2018

 
 
(Thousands of Dollars)
Net Income
 
$
1,751

 
$
2,352

Interest expense
 
1,499

 
878

Depreciation and amortization
 
4,442

 
3,026

Income tax expense
 
478

 
590

EBITDA
 
$
8,170

 
$
6,846

Share-based compensation
 
213

 
592

Equity in earnings (losses) of AMAK
 
59

 
(230
)
Adjusted EBITDA
 
$
8,442

 
$
7,208

 
 
 
 
 
Net Income
 
$
1,751

 
$
2,352

Equity in earnings (losses) of AMAK
 
$
59

 
$
(230
)
Taxes at statutory rate
 
(12
)
 
48

Tax effected equity in earnings (losses)
 
47

 
(182
)
Adjusted Net Income
 
$
1,798

 
$
2,170


Liquidity and Capital Resources

Working Capital


 
 
 
20
 



Our approximate working capital days are summarized as follows:
 
March 31, 2019

 
December 31, 2018

 
March 31, 2018

Days sales outstanding in accounts receivable
35.6

 
34.4

 
34.4

Days sales outstanding in inventory
23.4

 
21.0

 
19.7

Days sales outstanding in accounts payable
16.0

 
24.2

 
18.7

Days of working capital
43.0

 
31.1

 
35.4


Our days sales outstanding in accounts receivable at March 31, 2019 was 35.6 days compared to 34.4 days at December 31, 2018. Our days sales outstanding in inventory increased by approximately 2.4 days from December 31, 2018 mainly due to decrease in sales volume which increased inventory on hand. Our days sales outstanding in accounts payable decreased due to payment for the Advanced Reformer unit catalyst replacement which was completed in December 2018, severance payments and payment for supplemental wax feed. Since days of working capital is calculated using the above three metrics, it increased for the reasons discussed.

Cash increased $0.1 million during the three months ended March 31, 2019, as compared to a decrease of $0.5 million for the three months ended March 31, 2018.

The change in cash is summarized as follows:
 
 
THREE MONTHS ENDED MARCH 31,
 
 
2019

 
2018

Net cash provided by (used in)
 
(thousands of dollars)
Operating activities
 
$
824

 
$
2,735

Investing activities
 
(1,417
)
 
(11,072
)
Financing activities
 
691

 
7,877

Decrease in cash
 
$
98

 
$
(460
)
Cash
 
$
6,833

 
$
2,568


Operating Activities
Cash provided by operating activities totaled $0.8 million for the first three months of 2019, $1.9 million lower than the corresponding period in 2018. For the first three months of 2019 net income decreased by approximately $0.6 million as compared to the corresponding period in 2018. Major non-cash items affecting 2019 income in the first three months of 2019 included increases in deferred taxes of $0.4 million, depreciation and amortization of $4.4 million and stock-based compensation of $0.2 million. Major non-cash items affecting 2018 income in the first three months of 2018 included increases in deferred taxes of $0.4 million, depreciation of $2.6 million, and equity in earnings of AMAK of approximately $0.2 million.

Factors leading to a decrease in cash provided by operating activities included:

•
Accounts receivable decreased approximately $1.4 million due to a nearly 13% decline in revenues in first quarter 2019 compared with fourth quarter 2018;

•
Accounts payable and accrued liabilities decreased $6.8 million mainly due to payment for the Advanced Reformer unit catalyst replacement which was completed in December 2018, severance payments and payment for supplemental wax feed.

Investing Activities

Cash used in investing activities during the first three months of 2019 was approximately $1.4 million, representing a decrease of approximately $9.7 million over the corresponding period of 2018. During the first three months of 2019, the primary use of capital expenditures was for sales rack and Advanced Reformer unit improvements at SHR and equipment modifications at TC. This was offset by $1.3 million of proceeds received from AMAK for the repurchase of shares as

 
 
 
21
 



discussed in Note 10 on our Annual Report on Form 10-K for the year ending December 31, 2018. Our foreign tax liability resulting from AMAK's share repurchase program was $0.9 million. The cash to pay these taxes was withheld from the proceeds and will be paid directly by AMAK. As such, net cash received from AMAK was $0.4 million. During the first three months of 2018, we continued to purchase equipment for the hydrogenation/distillation unit and the new Advanced Reformer unit along with some tankage and various other facility improvements.

Financing Activities

Cash provided by financing activities during the first three months of 2019 was approximately $0.7 million versus cash provided of $7.9 million during the corresponding period of 2018. We drew $2.0 million on our line of credit for working capital purposes during the first three months of 2019. During 2018, we made principal payments on our acquisition loan of $3.5 million, our term debt of $0.7 million, and our line of credit facility of $2.0 million. We drew $10.0 million on our line of credit in the first three months of 2018 to fund ongoing capital projects.

Anticipated Cash Needs

We believe that the Company is capable of supporting its operating requirements and capital expenditures through internally generated funds supplemented with borrowings under our ARC Agreement.


 
 
 
22
 




Results of Operations

Comparison of Three Months Ended March 31, 2019 and 2018

Specialty Petrochemical Segment
 
 
2019

 
2018

 
Change

 
% Change

 
 
(thousands of dollars)
Specialty Petrochemical Product Sales
 
$
55,490

 
$
60,285

 
$
(4,795
)
 
(8.0
)%
Processing
 
1,383

 
2,028

 
(645
)
 
(31.8
)%
Gross Revenue
 
$
56,873

 
$
62,313

 
$
(5,440
)
 
(8.7
)%
 
 
 
 
 
 
 
 
 
Volume of Sales (gallons)
 
 
 
 
 
 
 
 
Specialty Petrochemical Products
 
22,468

 
23,289

 
(821
)
 
(3.5
)%
Prime Product Sales
 
17,638

 
17,651

 
(13
)
 
(0.1
)%
 
 
 
 
 
 
 
 
 
Cost of Sales
 
$
45,866

 
$
52,649

 
$
(6,783
)
 
(12.9
)%
Gross Margin
 
19.4
%
 
15.5
%
 


 
3.8
 %
Total Operating Expense*
 
18,280

 
15,843

 
2,437

 
15.4
 %
Natural Gas Expense*
 
1,383

 
1,248

 
135

 
10.8
 %
Operating Labor Costs*
 
3,703

 
3,759

 
(56
)
 
(1.5
)%
Transportation Costs*
 
7,048

 
7,320

 
(272
)
 
(3.7
)%
General & Administrative Expense
 
2,475

 
2,820

 
(345
)
 
(12.2
)%
Depreciation and Amortization**
 
3,074

 
1,714

 
1,360

 
79.3
 %
Capital Expenditures
 
1,378

 
10,283

 
(8,905
)
 
(86.6
)%
* Included in cost of sales
**Includes $2,905 and $1,548 for 2019 and 2018, respectively, which is included in operating expense

Gross Revenue

Gross Revenue for our specialty petrochemical segment decreased during first quarter 2019 from first quarter 2018 by 8.7%, primarily due to a decrease in the average selling price of specialty petrochemical products of 4.6%, decline in specialty petrochemical product sales volume of 3.5% and a 31.8% decrease in processing revenue.

Specialty Petrochemical Product Sales

Specialty petrochemical product sales decreased by 8.0% during first quarter 2019 from first quarter 2018 due mainly to a 4.6% decrease in average selling price and a decline in specialty petrochemical sales volume. Prime product sales volume were flat as compared to first quarter 2018 and declined 5.5% compared to the fourth quarter due to lower sales to the Canadian oil sands. Average selling price decreased as prices for both prime products and by-products declined in concert with lower feedstock cost which were 19% lower than the first quarter of 2018. It should be noted that by-products are produced as a result of prime product production and their margins are significantly lower than margins for our prime products. Foreign sales volume increased to 25.1% of total specialty petrochemical volume from 24.9% in first quarter 2018.

 
 
 
23
 



Processing

Processing revenues decreased 31.8% in first quarter 2019 from first quarter 2018 due to the termination of a customer contract in the fourth quarter 2018.

Cost of Sales

Cost of Sales declined 12.9% during the first quarter 2019 from the first quarter in 2018 primarily due to the decrease in feedstock cost which was partially offset by higher operating expenses. Our average feedstock cost per gallon declined 19% compared to the first quarter of 2018 due to an approximately 18% drop in the benchmark price of Mont Belvieu natural gasoline. Our average feedstock cost per gallon for the first quarter 2019 was down approximately 15% from the fourth quarter of 2018. During the course of the first quarter of 2019, feedstock costs have steadily risen month by month. We sell our prime products under both formula-based pricing where feedstock costs are passed through to the customer and spot or non-formula-based pricing which do not have pricing formulas tied to feedstock costs. Formula-based pricing is used to sell the majority of our prime products. Additionally, we cost our inventory on FIFO basis thus in a rising feedstock market our margins benefit from the FIFO method of inventory costing.

We use natural gasoline as feedstock which is the heavier liquid remaining after ethane, propane and butanes are removed from liquids produced by natural gas wells. The material is a commodity product in the oil/petrochemical markets and generally is readily available. The price of natural gasoline normally correlates approximately 90% with the price of crude oil. Our Advanced Reformer unit upgrades the byproduct stream produced as a result of prime product production. This upgrade allows us to sell our byproducts at higher prices than would be possible without the Advanced Reformer unit.

The gross margin percentage for the Specialty Petrochemical Segment increased from 15.5% in the first quarter of 2018 to 19.4% in the first quarter of 2019 driven by lower cost of sales as a result of lower feedstock costs. In the fourth quarter of 2018 our gross margin percentage was 3.9%.

Total Operating Expense

Total Operating Expense increased 15.4% during the first quarter 2019 from 2018. The key drivers for the increase was higher depreciation and amortization related to the Advanced Reformer unit which was not operational in the first quarter 2018 and higher natural gas costs. Certain costs, including labor costs associated with the construction of the Advanced Reformer unit, were capitalized in the first quarter 2018. In the first quarter 2019, labor costs were down approximately 20% relative to fourth quarter 2018 in part due to the cost reduction program implemented at SHR in December 2018.

Capital Expenditures

Capital Expenditures in the first quarter 2019 were approximately $1.4 million compared to $10.3 million in the first quarter 2018. This was primarily due to the completion of the Advanced Reformer unit project.



 
 
 
24
 



Specialty Wax Segment
 
 
2019

 
2018

 
Change

 
% Change

 
 
(thousands of dollars)
Product Sales
 
$
6,003

 
$
6,383

 
$
(380
)
 
(6.0
)%
Processing
 
2,279

 
3,212

 
(933
)
 
(29.0
)%
Gross Revenue
 
$
8,282

 
$
9,595

 
$
(1,313
)
 
(13.7
)%
 
 
 
 
 
 
 
 
 
Volume of specialty wax sales (thousand pounds)
 
7,882

 
9,541

 
(1,659
)
 
(17.4
)%
 
 
 
 
 
 
 
 
 
Cost of Sales
 
$
9,216

 
$
9,119

 
$
97

 
1.1
 %
Gross Margin
 
(11.3
)%
 
5.0
%
 


 
(16.2
)%
General & Administrative Expense
 
1,269

 
1,368

 
(99
)
 
(7.2
)%
Depreciation and Amortization*
 
1,348

 
1,304

 
44

 
3.4
 %
Capital Expenditures
 
$
509

 
$
745

 
$
(236
)
 
(31.7
)%
*Includes $1,324 and $1,282 for 2019 and 2018, respectively, which is included in cost of sales

Product Sales

Product sales revenue decreased 6.0% during first quarter 2019 from first quarter 2018 as specialty wax sales volume declined 17.4%. Planned maintenance turnaround at our Pasadena facility along with outages at our wax feed suppliers constrained specialty wax production and thereby sales. Our average specialty wax selling price increased 14% from first quarter 2018 reflecting our marketing strategy to enhance pricing and improve sales mix. Customer demand continues to be strong for our higher value specialty waxes including our products for the Hot Melt Adhesives ("HMA") and PVC Lubricant markets. These products are characterized by generally higher margins and growth rates.

Processing

Processing revenues declined nearly a million dollars or 29.0% during first quarter 2019 from first quarter 2018. The decrease among other factors is due to minimal revenues from hydrogenation/distillation unit as we work to improve the unit's reliability.

Cost of Sales

Cost of Sales increased 1.1% during first quarter 2019 from first quarter 2018. Operating expenses including costs for labor, maintenance, and utilities were relatively flat from first quarter 2018.

Depreciation

Depreciation increased 3.4% during first quarter 2019 from 2018.

Capital Expenditures

Capital Expenditures were approximately $0.5 million in the first quarter 2019.



 
 
 
25
 



Corporate Segment
 
 
2019

 
2018

 
Change

 
% Change

 
 
(in thousands)
 
 
General & Administrative Expense
 
$
2,305

 
$
2,147

 
$
158

 
7.4
%
Equity in earnings (losses) of AMAK
 
(59
)
 
230

 
(289
)
 
125.7
%

General and Administrative Expenses

General corporate expenses increased during first quarter 2019 from first quarter 2018. The increase is primarily attributable to higher legal and investor relations expenses.

Equity in Earnings (Losses) of AMAK

Equity in earnings (losses) of AMAK decreased during first quarter 2019 from first quarter 2018. The equity in earnings (losses) were impacted by increased selling, general and administrative expenses.

AMAK Summarized Income Statement

 
 
Three Months Ended March 31,
 
 
2019
 
2018
 
 
(thousands of dollars)
Sales
 
$
20,664

 
$
14,087

Cost of sales
 
18,570

 
12,506

Gross profit (loss)
 
2,094

 
1,581

Selling, general, and administrative
 
2,738

 
1,523

Operating income (loss)
 
(644
)
 
58

Other income
 
428

 
20

Finance and interest expense
 
(445
)
 
(397
)
Loss before Zakat and income taxes
 
(661
)
 
(319
)
Zakat and income taxes
 
522

 
—

Net Loss
 
$
(1,183
)
 
$
(319
)
 
 
 
 
 
Finance and interest expense
 
445

 
397

Depreciation and amortization
 
7,325

 
7,701

Zakat and income taxes
 
522

 
—

EBITDA
 
$
7,109

 
$
7,779



AMAK continued to make progress in throughput rates, concentrate quality and recoveries. Approximately 14,000 dry metric tons (dmt) of copper and zinc concentrate were shipped in first quarter 2019 as compared to 10,000 dmt of copper and zinc concentrate in first quarter 2018. First quarter EBITDA shows a decline of approximately $0.7 million compared to first quarter 2018 due to increased selling, general and administrative expenses.

Contractual Obligations

Our contractual obligations are summarized in Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations," in our Annual Report on Form 10-K for the year ended December 31, 2018. See Note 10 for changes to our debt maturity schedule. There have been no other material changes to the contractual obligation amounts disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018.


 
 
 
26
 



Critical Accounting Policies and Estimates

Critical accounting policies are more fully described in Note 2, “Summary of Significant Accounting Policies” to the consolidated financial statements set forth in our Annual Report on Form 10-K for the year ended December 31, 2018. The preparation of consolidated financial statements in accordance with generally accepted accounting principles requires management to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the period reported. By their nature, these estimates, assumptions and judgments are subject to an inherent degree of uncertainty. We base our estimates, assumptions and judgments on historical experience, market trends and other factors that are believed to be reasonable under the circumstances. Estimates, assumptions and judgments are reviewed on an ongoing basis and the effects of revisions are reflected in the consolidated financial statements in the period they are determined to be necessary. Actual results may differ from these estimates under different assumptions or conditions. Our critical accounting policies and estimates have been discussed with the Audit Committee of the Board of Directors and discussed in our Annual Report on Form 10-K for the year ended December 31, 2018. For the three months ended March 31, 2019, there were no significant changes to these policies except for the policies related to the accounting for leases as a result of the adoption of ASU 2016-02, Leases, as of January 1, 2019 as described in Note 1 – General and Note 8 – Leases in the accompanying condensed consolidated financial statements.

Recent and New Accounting Standards

See Note 1 and 2 to the Consolidated Financial Statements for a summary of recent accounting guidance.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

There have been no material changes in the Company's exposure to market risk from the disclosure included in the Company's Annual Report on Form 10-K for the year ended December 31, 2018.

ITEM 4. CONTROLS AND PROCEDURES.

(a)
Evaluation of disclosure controls and procedures. Our Chief Executive Officer and Chief Financial Officer, with the participation of management, have evaluated the effectiveness of our "disclosure controls and procedures" (as defined in Rules 13a-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934) and determined that our disclosure controls and procedures were effective as of the end of the period covered by this report.

(b)
Changes in internal control. There were no significant changes in our internal control over financial reporting that occurred during the three months ended March 31, 2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 
 
 
27
 



PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

The Company is periodically named in legal actions arising from normal business activities. The Company evaluates the merits of these actions and, if it determines that an unfavorable outcome is probable and can be reasonably estimated, the Company will establish the necessary reserves. We are not currently involved in legal proceedings that could reasonably be expected to have a material adverse effect on our business, prospects, financial condition or results of operations. We may become involved in material legal proceedings in the future.

ITEM 1A. RISK FACTORS.

There have been no material changes from the risk factors previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2018.


 
 
 
28
 



ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

In connection with certain amendments to his Employment Contract, Peter M. Loggenberg, our Chief Sustainability Officer, was granted 4,400 restricted shares of our common stock on February 21, 2019.  The restricted shares were issued pursuant to an exemption from registration under Section 4(a)(2) of the Securities Act of 1933, as amended, and vest in equal increments over a three year period.

ITEM 6. EXHIBITS.

The following documents are filed or incorporated by reference as exhibits to this Report. Exhibits marked with an asterisk (*) are filed herewith and exhibits marked with a double asterisk (**) are furnished herewith. Exhibits marked with a plus sign (+) are compensatory plans.


Exhibit
Number
Description
10.1
10.2*+
10.3*+
10.4*
31.1*
31.2*
32.1**
32.2**
101.INS*
XBRL Instance Document
101.SCH*
XBRL Taxonomy Schema Document
101.CAL*
XBRL Taxonomy Calculation Linkbase Document
101.LAB*
XBRL Taxonomy Label Linkbase Document
101.PRE*
XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF*
XBRL Taxonomy Extension Definition Linkbase Document



 
 
 
29
 



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 thereunto duly authorized.

 
TRECORA RESOURCES
 
 
 
Dated: May 09, 2019
By:
 /s/ Sami Ahmad
 
 
Sami Ahmad
 
 
Principal Financial Officer and Duly Authorized Officer


 
 
 
30