Document

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, 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

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

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

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   

Number of shares of the Registrant's Common Stock (par value $0.10 per share), outstanding at July 31, 2019: 24,714,980.




TABLE OF CONTENTS

Item Number and Description
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 





PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.
TRECORA RESOURCES AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 
 
June 30,
2019
(Unaudited)
 
December 31,
2018
ASSETS
 
(thousands of dollars, except par value)
 Current Assets
 
 
 
 
Cash
 
$
4,325

 
$
6,735

Trade receivables, net
 
30,518

 
27,112

Inventories
 
15,295

 
16,539

Prepaid expenses and other assets
 
3,951

 
4,664

Taxes receivable
 
182

 
182

Total current assets
 
54,271

 
55,232

 
 
 
 
 
Plant, pipeline and equipment, net
 
191,528

 
194,657

 
 
 
 
 
Goodwill
 
21,798

 
21,798

Intangible assets, net
 
18,016

 
18,947

Investment in AMAK
 
37,265

 
38,746

Lease right of use assets, net
 
15,197

 
—

Mineral properties in the United States
 
558

 
588

 
 
 
 
 
TOTAL ASSETS
 
$
338,633

 
$
329,968

LIABILITIES
 
 
 
 
Current Liabilities
 
 
 
 
Accounts payable
 
$
11,159

 
$
19,106

Accrued liabilities
 
5,415

 
5,439

Current portion of long-term debt
 
4,194

 
4,194

Current portion of lease liabilities
 
3,412

 
—

Current portion of other liabilities
 
850

 
752

Total current liabilities
 
25,030

 
29,491

 
 
 
 
 
  Long-term debt, net of current portion
 
94,191

 
98,288

Lease liabilities, net of current portion
 
11,785

 
—

  Other liabilities, net of current portion
 
1,047

 
1,352

Deferred income taxes
 
16,623

 
15,676

Total liabilities
 
148,676

 
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
 
2,472

 
2,463

Additional paid-in capital
 
58,920

 
58,294

Common stock in treasury, at cost
 
(2
)
 
(8
)
Retained earnings
 
128,278

 
124,123

Total Trecora Resources Stockholders' Equity
 
189,668

 
184,872

Noncontrolling Interest
 
289

 
289

Total equity
 
189,957

 
185,161

 
 
 
 
 
TOTAL LIABILITIES AND EQUITY
 
$
338,633

 
$
329,968


See notes to consolidated financial statements.

 
 
 
1
 



TRECORA RESOURCES AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
 
 
THREE MONTHS ENDED
JUNE 30,
 
SIX MONTHS ENDED
JUNE 30,
 
 
2019
 
2018
 
2019
 
2018
 
 
(thousands of dollars, except per share amounts)
REVENUES
 
 
 
 
 
 
 
 
Product sales
 
$
65,329

 
$
63,569

 
$
126,822

 
$
130,268

Processing fees
 
4,042

 
4,537

 
7,704

 
9,579

 
 
69,371

 
68,106

 
134,526

 
139,847

 
 
 
 
 
 
 
 
 
OPERATING COSTS AND EXPENSES
 
 
 
 
 
 
 
 
Cost of sales and processing
 
 
 
 
 
 
 
 
(including depreciation and amortization of $4,128, $2,837, $8,357 and $5,667, respectively)
 
58,806

 
59,964

 
113,888

 
121,565

 
 
 
 
 
 
 
 
 
    GROSS PROFIT
 
10,565

 
8,142

 
20,638

 
18,282

 
 
 
 
 
 
 
 
 
GENERAL AND ADMINISTRATIVE EXPENSES
 
 
 
 
 
 
 
 
General and administrative
 
6,081

 
4,554

 
12,131

 
10,889

Depreciation
 
208

 
191

 
421

 
387

 
 
6,289

 
4,745

 
12,552

 
11,276

 
 
 
 
 
 
 
 
 
OPERATING INCOME
 
4,276

 
3,397

 
8,086

 
7,006

 
 
 
 
 
 
 
 
 
OTHER INCOME (EXPENSE)
 
 
 
 
 
 
 
 
Interest income
 
—

 
14

 
5

 
21

Interest expense
 
(1,401
)
 
(815
)
 
(2,900
)
 
(1,693
)
Equity in (losses) earnings of AMAK
 
(91
)
 
228

 
(150
)
 
458

Miscellaneous income (expense), net
 
284

 
(13
)
 
256

 
(39
)
 
 
(1,208
)
 
(586
)
 
(2,789
)
 
(1,253
)
 
 
 
 
 
 
 
 
 
INCOME BEFORE INCOME TAXES
 
3,068

 
2,811

 
5,297

 
5,753

 
 
 
 
 
 
 
 
 
INCOME TAX EXPENSE
 
664

 
596

 
1,142

 
1,186

 
 
 
 
 
 
 
 
 
NET INCOME
 
2,404

 
2,215

 
4,155

 
4,567

 
 
 
 
 
 
 
 
 
NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST
 
—

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
NET INCOME ATTRIBUTABLE TO TRECORA RESOURCES
 
$
2,404

 
$
2,215

 
$
4,155

 
$
4,567

 
 
 
 
 
 
 
 
 
Basic Earnings per Common Share
 
 
 
 
 
 
 
 
Net income attributable to Trecora Resources (dollars)
 
$
0.10

 
$
0.09

 
$
0.17

 
$
0.19

 
 
 
 
 
 
 
 
 
Basic weighted average number of common shares outstanding
 
24,696

 
24,370

 
24,675

 
24,354

 
 
 
 
 
 
 
 
 
Diluted Earnings per Common Share
 
 
 
 
 
 
 
 
Net income attributable to Trecora Resources (dollars)
 
$
0.10

 
$
0.09

 
$
0.17

 
$
0.18

 
 
 
 
 
 
 
 
 
Diluted weighted average number of common shares outstanding
 
25,091

 
25,014

 
25,089

 
25,119


See notes to consolidated financial statements.

 
 
 
2
 



TRECORA RESOURCES AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
THREE MONTHS ENDED JUNE 30
 
 
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)
March 31, 2019
 
24,687

 
$
2,469

 
$
58,565

 
$
(8
)
 
$
125,874

 
$
186,900

 
$
289

 
$
187,189

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Restricted Stock Units
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Issued to Directors
 
—

 
—

 
146

 
—

 
—

 
146

 
—

 
146

Issued to Employees
 
—

 
—

 
209

 
—

 
—

 
209

 
—

 
209

Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Issued to Directors
 
10

 
1

 
—

 
6

 
—

 
7

 
—

 
7

Issued to Employees
 
18

 
2

 
—

 
—

 
—

 
2

 
—

 
2

Net Income
 
—

 
—

 
—

 
—

 
2,404

 
2,404

 
—

 
2,404

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2019
 
24,715

 
$
2,472

 
$
58,920

 
$
(2
)
 
$
128,278

 
$
189,668

 
$
289

 
$
189,957

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2018
 
24,311

 
$
2,451

 
$
56,422

 
$
(184
)
 
$
128,807

 
$
187,496

 
$
289

 
$
187,785

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stock Options
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Issued to Directors
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Issued to Employees
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Cancellation of Issuance to Former Director
 
—

 
—

 
(680
)
 
—

 
—

 
(680
)
 
—

 
(680
)
Restricted Stock Units
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Issued to Directors
 
—

 
—

 
82

 
—

 
—

 
82

 
—

 
82

Issued to Employees
 
—

 
—

 
385

 
—

 
—

 
385

 
—

 
385

Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Issued to Directors
 
—

 
—

 
(15
)
 
13

 
—

 
(2
)
 
—

 
(2
)
Issued to Employees
 
—

 
—

 
171

 
110

 
—

 
281

 
—

 
281

Stock Exchange
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Warrants
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Net Income
 
—

 
—

 
—

 
—

 
2,215

 
2,215

 
—

 
2,215

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
SIX MONTHS ENDED JUNE 30
 
 
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
 
—

 
—

 
168

 
—

 
—

 
168

 
—

 
168

Issued to Employees
 
—

 
—

 
458

 
—

 
—

 
458

 
—

 
458

Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Issued to Directors
 
10

 
1

 
—

 
6

 
—

 
7

 
—

 
7

Issued to Employees
 
79

 
8

 
—

 
—

 
—

 
8

 
—

 
8

Net Income
 
—

 
—

 
—

 
—

 
4,155

 
4,155

 
—

 
4,155

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2019
 
24,715

 
$
2,472

 
$
58,920

 
$
(2
)
 
$
128,278

 
$
189,668

 
$
289

 
$
189,957

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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

Cancellation of Issuance to Former Director
 
—

 
—

 
(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
 
—

 
—

 
(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.

 
 
 
4
 




TRECORA RESOURCES AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
 
SIX MONTHS ENDED
JUNE 30,
 
 
2019
 
2018
 
 
(thousands of dollars)
OPERATING ACTIVITIES
 
 
 
 
Net Income
 
$
4,155

 
$
4,567

Adjustments to Reconcile Net Income
 
 
 
 
To Net Cash Provided by Operating Activities:
 
 
 
 
Depreciation and Amortization
 
7,880

 
4,941

Amortization of Intangible Assets
 
931

 
931

Stock-based Compensation
 
558

 
372

Deferred Income Taxes
 
947

 
1,073

Postretirement Obligation
 
(18
)
 
(809
)
Equity in Losses (Earnings) of AMAK
 
150

 
(458
)
Bad Debt Expense
 
—

 
128

Amortization of Loan Fees
 
91

 
161

Changes in Operating Assets and Liabilities:
 
 
 
 
Increase in Trade Receivables
 
(3,393
)
 
(817
)
Increase in Insurance Receivables
 
—

 
(493
)
Decrease in Taxes Receivable
 
—

 
4,293

Decrease in Inventories
 
1,244

 
1,448

Decrease (Increase) in Prepaid Expenses and Other Assets
 
16

 
(901
)
Decrease in Accounts Payable and Accrued Liabilities
 
(6,767
)
 
(4,742
)
Decrease in Other Liabilities
 
54

 
104

Net Cash Provided by Operating Activities
 
5,848

 
9,798

 
 
 
 
 
INVESTING ACTIVITIES
 
 
 
 
Additions to Plant, Pipeline and Equipment
 
(4,286
)
 
(15,434
)
Proceeds from PEVM
 
30

 
—

Advances to AMAK, net
 
(26
)
 
(83
)
Proceeds from AMAK Share Repurchase
 
440

 
—

Net Cash Used in Investing Activities
 
(3,842
)
 
(15,517
)
 
 
 
 
 
FINANCING ACTIVITIES
 
 
 
 
Net Cash (Paid) Received Related to Stock-Based Compensation
 
(228
)
 
245

Additions to Long-Term Debt
 
2,000

 
16,000

Repayments of Long-Term Debt
 
(6,188
)
 
(10,167
)
Net Cash (Used in) Provided by Financing Activities
 
(4,416
)
 
6,078

 
 
 
 
 
NET (DECREASE) INCREASE IN CASH
 
(2,410
)
 
359

 
 
 
 
 
CASH AT BEGINNING OF PERIOD
 
6,735

 
3,028

 
 
 
 
 
CASH AT END OF PERIOD
 
$
4,325

 
$
3,387

 
 
 
 
 
Supplemental disclosure of cash flow information:
 
 
Cash payments for interest
 
$
1,355

 
$
2,394

Cash payments for taxes, net of refunds
 
$
80

 
$
92

Supplemental disclosure of non-cash items:
 
 
 
 
Capital expansion amortized to depreciation expense
 
$
244

 
$
210

Foreign taxes paid by AMAK
 
$
891

 
$
—

Stock exchange (Note 16)
 
$
—

 
$
130

See notes to consolidated financial statements.

 
 
 
5
 



TRECORA RESOURCES AND SUBSIDIARIES

NOTES TO CONDENSED 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 Petrochemicals segment and parent of GSPL
(4)
GSPL – Gulf State Pipe Line Co, Inc. – Pipeline support for the Specialty Petrochemicals segment
(5)
TC – Trecora Chemical, Inc. – Specialty Waxes 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 six months ended June 30, 2019 are not necessarily indicative of results for the year ending December 31, 2019.

We currently operate in two segments, Specialty Petrochemicals 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

 
 
 
6
 



expedients, which permits it not to reassess 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.

 
 
 
7
 



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:
 
 
June 30, 2019

 
December 31, 2018

 
 
(thousands of dollars)
Trade receivables
 
$
30,958

 
$
27,564

Less allowance for doubtful accounts
 
(440
)
 
(452
)
Trade receivables, net
 
$
30,518

 
$
27,112


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



 
 
 
8
 



4. PREPAID EXPENSES AND OTHER ASSETS

Prepaid expenses and other assets consisted of the following:
 
 
June 30, 2019

 
December 31, 2018

 
 
(thousands of dollars)
Prepaid license
 
$
1,612

 
$
2,419

Spare parts
 
1,667

 
1,597

Other prepaid expenses and assets
 
672

 
648

Total prepaid expenses and other assets
 
$
3,951

 
$
4,664


5. INVENTORIES

Inventories included the following:
 
 
June 30, 2019

 
December 31, 2018

 
 
(thousands of dollars)
Raw material
 
$
3,963

 
$
4,742

Work in process
 
244

 
173

Finished products
 
11,088

 
11,624

Total inventory
 
$
15,295

 
$
16,539


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

Inventory included Specialty Petrochemicals products in transit valued at approximately $3.2 million and $4.1 million at June 30, 2019, and December 31, 2018, respectively.

6. PLANT, PIPELINE AND EQUIPMENT

Plant, pipeline and equipment consisted of the following:
 
 
June 30, 2019

 
December 31, 2018

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

 
$
1,612

Catalyst
 
3,974

 
3,131

Land
 
5,428

 
5,428

Plant, pipeline and equipment
 
257,986

 
253,905

Construction in progress
 
3,888

 
4,343

Total plant, pipeline and equipment
 
$
272,856

 
$
268,419

Less accumulated depreciation
 
(81,328
)
 
(73,762
)
Net plant, pipeline and equipment
 
$
191,528

 
$
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 $0.0 million and $0.4 million for the three months and $0.0 million and $0.7 million for the six months ended June 30, 2019 and 2018, respectively.

Labor capitalized for construction was approximately $0.0 million and $0.9 million for the three months and $0.1 million and $2.1 million for the six months ended June 30, 2019 and 2018, respectively.

Construction in progress during the first six months of 2019 included sales rack and Advanced Reformer unit improvements at SHR and equipment modifications at TC. Construction in progress during the first six months of 2018 included equipment purchased for various equipment updates at the TC facility, the Advanced Reformer unit, tankage upgrades, and an addition to the rail spur at SHR.

 
 
 
9
 



Amortization relating to the catalyst, which is included in cost of sales, was approximately $0.2 million and $0.0 million for the three months and $0.5 million and $0.0 million for the six months ended June 30, 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:
 
 
June 30, 2019
 
 
Gross
 
Accumulated
Amortization
 
Net
Intangible assets subject to amortization (Definite-lived)
 
(thousands of dollars)
Customer relationships
 
$
16,852

 
$
(5,336
)
 
$
11,516

Non-compete agreements
 
94

 
(90
)
 
4

Licenses and permits
 
1,471

 
(549
)
 
922

Developed technology
 
6,131

 
(2,912
)
 
3,219

 
 
24,548

 
(8,887
)
 
15,661

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

 
—

 
197

Trade name
 
2,158

 
—

 
2,158

Total
 
$
26,903

 
$
(8,887
)
 
$
18,016

 
 
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 June 30, 2019 and 2018, was approximately $0.5 million and $0.5 million, and for the six months ended June 30, 2019 and 2018, was approximately $0.9 million and $0.9 million, respectively.

 
 
 
10
 



Based on identified intangible assets that are subject to amortization as of June 30, 2019, we expect future amortization expenses for each period to be as follows:
 
 
Total

 
Remainder of 2019

 
2020

 
2021

 
2022

 
2023

 
2024

 
Thereafter

 
 
(thousands of dollars)
Customer relationships
 
$
11,516

 
$
562

 
$
1,123

 
$
1,123

 
1,123

 
1,123

 
1,123

 
$
5,339

Non-compete agreements
 
4

 
4

 
—

 
—

 
—

 
—

 
—

 
—

Licenses and permits
 
922

 
53

 
106

 
101

 
86

 
86

 
86

 
404

Developed technology
 
3,219

 
307

 
613

 
613

 
613

 
613

 
460

 
—

Total future amortization expense
 
$
15,661

 
$
926

 
$
1,842

 
$
1,837

 
$
1,822

 
$
1,822

 
$
1,669

 
$
5,743


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
June 30, 2019
 
Six Months Ended
June 30, 2019
Operating lease cost (a)
Cost of sales, exclusive of depreciation and amortization
$
1,152

 
$
2,291

Operating lease cost (a)
Selling, general and administrative
38

 
72

Total operating lease cost
 
$
1,190

 
$
2,363

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

 
—

Interest on lease liabilities
Interest Expense
—

 
—

Total finance lease cost
 
$
—

 
$
—

 
 
 
 
 
Total lease cost
 
$
1,190

 
$
2,363

 
 
 
 
 
(a) Short-term lease costs were approximately $64 thousand during the period.
 
 

 
 
 
11
 



The Company had no variable lease expense, as defined by ASC 842, during the period.
($ in thousands)
Classification on the Condensed Consolidated Balance Sheets
June 30, 2019
Assets:
 
 
Operating
Operating lease assets
$
15,197

Finance
Property, plant, and equipment
—

Total leased assets
 
$
15,197

 
 
 
Liabilities:
 
 
Current
 
 
Operating
Current portion of operating lease liabilities
$
3,412

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

Noncurrent
 
 
Operating
Operating lease liabilities
11,785

Finance
Long-term debt
—

Total lease liabilities
 
$
15,197

($ in thousands)
Three Months Ended
June 30, 2019
 
Six Months Ended
June 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 
 
 
Operating cash flows used for operating leases
$
1,127

 
$
2,260

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
$
25

 
$
138

Finance leases
—

 
—

 
June 30, 2019
Weighted-average remaining lease term (in years):
 
Operating leases
4.8

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 June 30, 2019, maturities of lease liabilities were as follows:
($ in thousands)
Operating Leases
Finance Leases
2020
$
4,010

$
—

2021
3,576

—

2022
3,480

—

2023
2,806

—

2024
1,460

—

Thereafter
1,549

—

Total lease payments
$
16,881

$
—

Less: Interest
1,684

—

Total lease obligations
$
15,197

$
—


 
 
 
12
 



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:
 
 
June 30, 2019

 
December 31, 2018

 
 
(thousands of dollars)
Accrued state taxes
 
262

 
210

Accrued property taxes
 
1,720

 
—

Accrued payroll
 
981

 
936

Accrued interest
 
32

 
31

Accrued officer compensation
 
650

 
—

Accrued restructuring & severance
 
37

 
1,221

Accrued foreign taxes
 
—

 
802

Other
 
1,733

 
2,239

Total
 
$
5,415

 
$
5,439


10. LIABILITIES AND LONG-TERM DEBT

Senior Secured Credit Facilities

As of June 30, 2019, we had $16.0 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 $83.1 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 $42 million of available borrowings under our Revolving Facility at June 30, 2019. TOCCO’s ability to make additional borrowings under the Revolving Facility at June 30, 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 June 30, 2019, the effective interest rate for the Credit Facilities was 4.87%. The ARC Agreement contains a number of customary affirmative and negative covenants and we were in compliance with those covenants as of June 30, 2019.


 
 
 
13
 



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.

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 $0.7 million and $0.8 million for the periods ended June 30, 2019 and December 31, 2018, have been netted against outstanding loan balances.

Long-term debt and long-term obligations are summarized as follows:
 
June 30, 2019
 
December 31, 2018
 
(thousands of dollars)
Revolving Facility
16,000

 
18,000

Term Loan Facility
83,125

 
85,312

Loan fees
(740
)
 
(830
)
Total long-term debt
98,385

 
102,482

 
 
 
 
Less current portion including loan fees
4,194

 
4,194

 
 
 
 
Total long-term debt, less current portion including loan fees
94,191

 
98,288


Subsequent to June 30, 2019, we made an optional principal payment of $4.0 million against the Revolving Facility, reducing the outstanding amount from $16.0 million to $12.0 million.

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. As amended, the Plan allots for the issuance of up to 2.5 million shares in the form of stock options or restricted stock unit awards.

Share-based compensation of approximately $0.3 million and $(0.2) million was recognized during the three months and $0.6 million and $0.4 million for the six months ended June 30, 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 or six months ended June 30, 2019 or 2018.

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

 
 
 
14
 



 
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 June 30, 2019
552,000

 
11.04
 
3.8
 
$
—

Expected to vest
—

 
 
 
 
 
$
—

Exercisable at June 30, 2019
552,000

 
11.04
 
3.8
 
$
—


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 June 30, 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 June 30, 2019 and 2018, respectively, was $0. During the six months ended June 30, 2019 and 2018, the aggregate intrinsic value of options and warrants exercised was approximately $0.1 million and $0.6 million respectively, determined as of the date of option exercise.

The Company received no cash from the exercise of options during the six months ended June 30, 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 June 30, 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
(64,463
)
 
12.13
Vested
(136,568
)
 
11.86
Outstanding at June 30, 2019
395,259

 
9.77
Expected to vest
395,259

 
 

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 the audit was complete. We

 
 
 
15
 



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 2018. As of June 30, 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 and six months ended June 30, 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.

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 June 30, 2019 and 2018, respectively.

 
 
Three Months Ended
June 30, 2019
 
Three Months Ended
June 30, 2018
 
 
Income

 
Shares

 
Per Share
Amount

 
Income

 
Shares

 
Per Share
Amount

Basic Net Income per Share:
 
 
 
 
 
 
 
 
 
 
 
 
Net Income Attributable to Trecora Resources
 
$
2,404

 
24,696

 
$
0.10

 
$
2,215

 
24,370

 
$
0.09

Unvested restricted stock units
 
 
 
395

 
 
 
 
 
349

 
 
Dilutive stock options outstanding
 
 
 
—

 
 
 
 
 
295

 
 
Diluted Net Income per Share:
 
 
 
 
 
 
 
 
 
 
 
 
Net Income Attributable to Trecora Resources
 
$
2,404

 
25,091

 
$
0.10

 
$
2,215

 
25,014

 
$
0.09

 
 
Six Months Ended
June 30, 2019
 
Six Months Ended
June 30, 2018
 
 
Income

 
Shares

 
Per Share
Amount

 
Income

 
Shares

 
Per Share
Amount

Basic Net Income per Share:
 
 
 
 
 
 
 
 
 
 
 
 
Net Income Attributable to Trecora Resources
 
$
4,155

 
24,675

 
$
0.17

 
$
4,567