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


FORM 10-Q
(Mark One)

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

For the quarterly period ended March 31, 2020
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   X   

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 Exchange Act). Yes     No X  

Number of shares of the Registrant's Common Stock (par value $0.10 per share) outstanding at April 30, 2020: 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
 
 
March 31,
2020
(Unaudited)
 
December 31,
2019
ASSETS
 
(thousands of dollars, except par value)
 Current Assets
 
 
 
 
Cash
 
$
37,450

 
$
6,145

Trade receivables, net
 
28,396

 
26,320

Inventories
 
8,362

 
13,624

Investment in AMAK (held-for-sale)
 
28,869

 
32,872

Prepaid expenses and other assets
 
4,458

 
4,947

Taxes receivable
 
16,107

 
182

Total current assets
 
123,642

 
84,090

 
 
 
 
 
Plant, pipeline and equipment, net
 
187,211

 
188,919

 
 
 
 
 
Intangible assets, net
 
14,275

 
14,736

Lease right-of-use assets, net
 
12,711

 
13,512

Mineral properties in the United States
 
562

 
562

 
 
 
 
 
TOTAL ASSETS
 
$
338,401

 
$
301,819

LIABILITIES
 
 
 
 
Current Liabilities
 
 
 
 
Accounts payable
 
$
10,171

 
$
14,603

Accrued liabilities
 
6,720

 
5,740

Current portion of long-term debt
 
4,194

 
4,194

Current portion of lease liabilities
 
3,153

 
3,174

Current portion of other liabilities
 
1,021

 
924

Total current liabilities
 
25,259

 
28,635

 
 
 
 
 
  Long-term debt, net of current portion
 
98,046

 
79,095

  Post-retirement benefit, net of current portion
 
332

 
338

Lease liabilities, net of current portion
 
9,558

 
10,338

  Other liabilities, net of current portion
 
178

 
595

Deferred income taxes
 
22,512

 
11,375

Total liabilities
 
155,885

 
130,376

 
 
 
 
 
EQUITY
 
 
 
 
Common stock‑authorized 40 million shares of $0.10 par value; issued and outstanding 24.8 million and 24.8 million in 2020 and 2019, respectively
 
2,478

 
2,475

Additional paid-in capital
 
59,880

 
59,530

Retained earnings
 
119,869

 
109,149

Total Trecora Resources Stockholders' Equity
 
182,227

 
171,154

Noncontrolling Interest
 
289

 
289

Total equity
 
182,516

 
171,443

 
 
 
 
 
TOTAL LIABILITIES AND EQUITY
 
$
338,401

 
$
301,819


See notes to consolidated financial statements.

 
 
 
1
 




TRECORA RESOURCES AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 
 
THREE MONTHS ENDED
MARCH 31,
 
 
2020
 
2019
 
 
(thousands of dollars, except per share amounts)
REVENUES
 
 
 
 
Product sales
 
$
57,183

 
$
61,493

Processing fees
 
4,884

 
3,662

 
 
62,067

 
65,155

 
 
 
 
 
OPERATING COSTS AND EXPENSES
 
 
 
 
Cost of sales and processing
 
 
 
 
(including depreciation and amortization of $3,952 and $4,229, respectively)
 
53,989

 
55,082

 
 
 
 
 
    GROSS PROFIT
 
8,078

 
10,073

 
 
 
 
 
GENERAL AND ADMINISTRATIVE EXPENSES
 
 
 
 
General and administrative
 
6,674

 
6,034

Depreciation
 
216

 
213

 
 
6,890

 
6,247

 
 
 
 
 
OPERATING INCOME
 
1,188

 
3,826

 
 
 
 
 
OTHER INCOME (EXPENSE)
 
 
 
 
Interest income
 

 
5

Interest expense
 
(916
)
 
(1,499
)
Miscellaneous income (expense), net
 
(62
)
 
(28
)
 
 
(978
)
 
(1,522
)
 
 
 
 
 
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
 
210

 
2,304

 
 
 
 
 
INCOME TAX EXPENSE (BENEFIT)
 
(5,653
)
 
494

 
 
 
 
 
INCOME FROM CONTINUING OPERATIONS
 
5,863

 
1,810

 
 
 
 
 
INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF TAX
 
4,857

 
(59
)
 
 
 
 
 
NET INCOME
 
$
10,720

 
$
1,751

 
 
 
 
 
Basic Earnings per Common Share
 
 
 
 
Net income from continuing operations (dollars)
 
$
0.24

 
$
0.07

Net income from discontinued operations, net of tax (dollars)
 
0.20

 

Net income (dollars)
 
$
0.44

 
$
0.07

 
 
 
 
 
Basic weighted average number of common shares outstanding
 
24,765

 
24,653

 
 
 
 
 
Diluted Earnings per Common Share
 
 
 
 
Net income from continuing operations (dollars)
 
$
0.23

 
$
0.07

Net income from discontinued operations, net of tax (dollars)
 
0.19

 

Net income (dollars)
 
$
0.42

 
$
0.07

 
 
 
 
 
Diluted weighted average number of common shares outstanding
 
25,276

 
25,027


See notes to consolidated financial statements.

 
 
 
2
 




TRECORA RESOURCES AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
THREE MONTHS ENDED MARCH 31
 
 
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)
December 31, 2019
 
24,750

 
$
2,475

 
$
59,530

 
$

 
$
109,149

 
$
171,154

 
$
289

 
$
171,443

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Restricted Stock Units
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Issued to Directors
 

 

 
94

 

 

 
94

 

 
94

Issued to Employees
 

 

 
259

 

 

 
259

 

 
259

Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Issued to Employees
 
30

 
3

 
(3
)
 

 

 

 

 

Net Income
 

 

 

 

 
10,720

 
10,720

 

 
10,720

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2020
 
24,780

 
$
2,478

 
$
59,880

 
$

 
$
119,869

 
$
182,227

 
$
289

 
$
182,516

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
 
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 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
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
 
THREE MONTHS ENDED
MARCH 31,
 
 
2020
 
2019
 
 
(thousands of dollars)
OPERATING ACTIVITIES
 
 
 
 
Net Income
 
$
10,720

 
$
1,751

Income (Loss) from Discontinued Operations
 
4,857

 
(59
)
Income from Continuing Operations
 
$
5,863

 
$
1,810

Adjustments to Reconcile Income from Continuing Operations To Net Cash Provided by Operating Activities:
 
 
 
 
Depreciation and Amortization
 
3,492

 
3,977

Amortization of Intangible Assets
 
461

 
465

Stock-based Compensation
 
390

 
213

Deferred Income Taxes
 
10,385

 
374

Postretirement Obligation
 
10

 
(5
)
Amortization of Loan Fees
 
45

 
45

Loss on Disposal of Assets
 
18

 

Changes in Operating Assets and Liabilities:
 
 
 
 
Decrease (Increase) in Trade Receivables
 
(2,077
)
 
1,375

Decrease in Insurance Receivables
 
274

 

Increase in Taxes Receivable
 
(16,144
)
 

Decrease (Increase) in Inventories
 
5,263

 
(383
)
Decrease (Increase) in Prepaid Expenses and Other Assets
 
185

 
(227
)
Decrease in Accounts Payable and Accrued Liabilities
 
(3,739
)
 
(6,773
)
Decrease in Other Liabilities
 
(72
)
 
(34
)
Net Cash Provided by Operating Activities - Continuing Operations
 
4,354

 
837

Net Cash Used in Operating Activities - Discontinued Operations
 
(53
)
 
(13
)
Net Cash Provided by Operating Activities
 
4,301

 
824

INVESTING ACTIVITIES
 
 
 
 
Additions to Plant, Pipeline and Equipment
 
(2,065
)
 
(1,887
)
Proceeds from PEVM
 

 
30

Net Cash Used in Investing Activities - Continuing Operations
 
(2,065
)
 
(1,857
)
Net Cash Provided by Investing Activities - Discontinued Operations
 
10,163

 
440

Net Cash Provided by (Used in) Investing Activities
 
8,098

 
(1,417
)
FINANCING ACTIVITIES
 
 
 
 
Net Cash Paid Related to Stock-Based Compensation
 

 
(215
)
Additions to Long-Term Debt
 
20,000

 
2,000

Repayments of Long-Term Debt
 
(1,094
)
 
(1,094
)
Net Cash Provided by Financing Activities - Continuing Operations
 
18,906

 
691

NET INCREASE IN CASH
 
31,305

 
98

CASH AT BEGINNING OF PERIOD
 
6,145

 
6,735

CASH AT END OF PERIOD
 
$
37,450

 
$
6,833

Supplemental disclosure of cash flow information:
 
 
Cash payments for interest
 
$
870

 
$
1,210

Cash payments for taxes, net of refunds
 
$

 
$

Supplemental disclosure of non-cash items:
 
 
 
 
Capital expansion amortized to depreciation expense
 
$
262

 
$
68

Foreign taxes paid by AMAK
 
$

 
$
891


See notes to consolidated financial statements.

 
 
 
4
 




TRECORA RESOURCES AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. GENERAL

Organization

Trecora Resources (the "Company" or "TREC") 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," "TREC," and the "Company" are intended to mean Trecora Resources and its subsidiaries.

This document includes the following abbreviations:
(1)
TOCCO – Texas Oil & Chemical Co. II, Inc. – Wholly owned subsidiary of TREC and parent of SHR and TC
(2)
SHR – South Hampton Resources, Inc. – Specialty Petrochemicals segment and parent of GSPL
(3)
GSPL – Gulf State Pipe Line Co, Inc. – Pipeline support for the Specialty Petrochemicals segment
(4)
TC – Trecora Chemical, Inc. – Specialty Waxes segment
(5)
AMAK – Al Masane Al Kobra Mining Company – Held-for-sale mining equity investment – 28.3% ownership
(6)
PEVM – Pioche Ely Valley Mines, Inc. – Inactive mine – 55% ownership

Basis of Presentation

The accompanying unaudited condensed 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, 2019.

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, 2020 are not necessarily indicative of results for the year ending December 31, 2020.

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 28.3% interest in AMAK, a Saudi Arabian closed joint stock company, which owns, operates and is developing mining assets in Saudi Arabia. Our investment is classified as held-for-sale and and the equity in earnings (losses) are recorded in discontinued operations. See Note 5.

2. RECENT ACCOUNTING PRONOUNCEMENTS

Recently Adopted Accounting Pronouncements

Effective January 1, 2020, we adopted Financial Accounting Standard Board ("FASB") Accounting Standards Update ("ASU") 2016-13, Measurement of Credit Losses on Financial Instruments, which changed the way entities recognize impairment of most financial assets. Short-term and long-term financial assets, as defined by the standard, are impacted by immediate recognition of estimated credit losses in the financial statements, reflecting the net amount expected to be collected. The adoption of this standard did not have a material impact on our condensed consolidated financial statements.


 
 
 
5
 




Recent Accounting Pronouncements Not Yet Adopted

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (ASU 2019-12), which simplifies the accounting for income taxes. This guidance will be effective for us in the first quarter of 2021 on a prospective basis, and early adoption is permitted. We are currently evaluating the impact of the new guidance on our condensed consolidated financial statements.

In March 2020, the FASB issued ASU No. 2020–04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (ASU 2020-04), which provides guidance to alleviate the burden in accounting for reference rate reform by allowing certain expedients and exceptions in applying generally accepted accounting principles to contracts, hedging relationships, and other transactions impacted by reference rate reform. The provisions of ASU 2020-04 apply only to those transactions that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. Adoption of the provisions of ASU 2020-04 are optional and are effective from March 12, 2020 through December 31, 2022. We are currently evaluating the impact of ASU 2020-04 on our condensed consolidated financial statements.

3. TRADE RECEIVABLES

Trade receivables, net, consisted of the following:
 
 
March 31, 2020

 
December 31, 2019

 
 
(thousands of dollars)
Trade receivables
 
$
28,825

 
$
26,749

Less allowance for doubtful accounts
 
(429
)
 
(429
)
Trade receivables, net
 
$
28,396

 
$
26,320


Trade receivables serve as collateral for our amended and restated credit agreement. See Note 11.

4. INVENTORIES

Inventories included the following:
 
 
March 31, 2020

 
December 31, 2019

 
 
(thousands of dollars)
Raw material
 
$
1,298

 
$
2,100

Work in process
 
139

 
142

Finished products
 
6,925

 
11,382

Total inventory
 
$
8,362

 
$
13,624


Inventory serves as collateral for our amended and restated credit agreement. See Note 11.

Inventory included Specialty Petrochemicals products in transit valued at approximately $1.6 million and $2.9 million at March 31, 2020 and December 31, 2019, respectively.

5. INVESTMENT IN AMAK (Held-for-Sale)

As of March 31, 2020 and December 31, 2019, the Company had a non-controlling equity interest of 28.3% and 33.3% in AMAK of approximately $28.9 million and $32.9 million, respectively. This investment is accounted for under the equity method. There were no events or changes in circumstances that had an adverse effect on the fair value of our investment in AMAK at March 31, 2020.

The Company committed to a plan to sell our investment in AMAK during the third quarter of 2019. Management engaged in a comprehensive process to market the investment to numerous potential buyers. The process resulted in an agreement with certain AMAK stockholders in September 2019 to purchase our investment. Pursuant to a Share Sale and Purchase Agreement (as amended, the "Purchase Agreement") that was effective as of October 2, 2019, the Company agreed to sell its entire equity interest in AMAK, to AMAK and certain other existing stockholders of AMAK (collectively, the "Purchasers")

 
 
 
6
 




for an aggregate gross purchase price (before taxes and transaction expenses) of Saudi Riyals ("SAR") 264.7 million (or approximately US$70 million), which will be payable in US Dollars (collectively, the "Share Sale"). The Purchasers advanced 5% of the purchase price (or approximately $3.5 million) in the form of a non-refundable deposit, which was a condition to the effectiveness of the Purchase Agreement. The Purchase Agreement contained various representations, warranties and indemnity obligations of the Company and the Purchasers, including the release of the Company's guarantee as described in Note 12.

On January 16, 2020, the Company and the Purchasers entered into a letter agreement (the “January 2020 Amendment”) providing certain amendments to the Purchase Agreement. Pursuant to the January 2020 Amendment, the Long Stop Date (as defined in the Purchase Agreement) for completion of the Share Sale was extended to March 31, 2020 to allow additional time for the parties to obtain certain required governmental approvals. Under the Purchase Agreement, the Company had certain termination rights if closing of the Share Sale did not occur on or before the Long Stop Date. The January 2020 Amendment also provided that, if closing of the Share Sale does not occur on or before the extended Long Stop Date, and the Company determined in its sole discretion to further extend such date, then an amount equal to 50% of the approximately $3.5 million non-refundable deposit made by the Purchasers under the Purchase Agreement would be forfeited to the Company as liquidated damages and would not be applied to the purchase price at closing of the Share Sale.

Effective as of March 26, 2020, the Company and the Purchasers entered into a letter agreement, dated March 23, 2020 (the “March 2020 Amendment”), providing for certain additional amendments to the Purchase Agreement.

Pursuant to the March 2020 Amendment, the Company and the Purchasers agreed that the Share Sale may be completed with the respective Purchasers in multiple closings, in each case, subject to the completion of any remaining conditions precedent. To the extent that a Purchaser completed the purchase of all or a portion of the ordinary shares allotted to it under the Purchase Agreement on or before March 31, 2020, the non-refundable deposit paid by such Purchaser (or a portion of such deposit for a partial closing) was credited toward the purchase price of the ordinary shares being purchased. Purchasers that complete the purchase of all or a portion of their allotted ordinary shares after March 31, 2020 but on or before September 28, 2020 (the “New Long Stop Date”), will forfeit an amount equal to 50% of the non-refundable deposit paid by such Purchasers to the Company as liquidated damages and such amount shall not be applied to the purchase price paid by the applicable Purchaser. With respect to any Purchaser that has not completed the purchase of 100% of its allocated ordinary shares on or prior to the New Long Stop Date, (i) any remaining amount of non-refundable deposit paid by such Purchaser will be forfeited to the Company as liquidated damages as of September 29, 2020 and (ii) the Company may terminate the Purchase Agreement in accordance with its terms unless the Company elects, in its sole discretion, to further extend the New Long Stop Date.

On March 26, 2020, the Company and one Purchaser, Arab Mining Company, completed the first closing of the Share Sale (the “First Closing”). In connection with the First Closing, the Company sold 4,000,000 ordinary shares for an aggregate gross purchase price (before taxes and transaction expenses) of SAR 40 million (or approximately US$10.7 million) (inclusive of the credited amount of the Purchaser’s non-refundable deposit previously paid of US$0.5 million). The First Closing also included indemnification provisions which effectively reduced our portion of the loan guarantee (as discussed in Note 12). We recorded a foreign tax payable of approximately $0.3 million related to this transaction, which is offset by a foreign tax credit for U.S. tax purposes.

Pursuant to the March 2020 Amendment, the remaining Purchasers have agreed to use their best efforts to close the purchase of 100% of their respective allotments of ordinary shares as soon as possible. The March 2020 Amendment also provides that the Company will continue to have the right to appoint three directors of the board of directors of AMAK, and will enjoy all other governance rights it currently has, until the Share Sale has been completed in full. As of March 31, 2020, approximately $1.5 million of the initial deposits were forfeited to the Company as liquidated damages and will not be applied to the purchase price at closing. This amount was recorded as an increase to our investment in AMAK and a gain in discontinued operations.

As all the required criteria for held-for-sale classification was met in third quarter of 2019, the investment in AMAK is classified as held-for-sale in the Consolidated Balance Sheets and reflected as discontinued operations in the Consolidated Statements of Operations for all periods presented. The assets held-for-sale are disclosed by the Company in the Corporate segment. The Company expects to have no continuing involvement with the discontinued operations after the closing date.  The gain (loss) from discontinued operations, net of tax, include our portion of the equity in earnings (losses) in AMAK as well as other administrative expenses incurred in Saudi Arabia and transaction costs.


 
 
 
7
 




Included in discontinued operations are the following :
 
 
Three Months Ended March 31,
 
 
2020

 
2019

 
 
(thousands of dollars)
Saudi administration (income) expenses
 
$
(17
)
 
$
16

Equity in losses of AMAK
 
532

 
59

Gain on sale of equity interest
 
(6,663
)
 

(Income) loss from discontinued operations before taxes
 
(6,148
)
 
75

Tax expense (benefit)
 
1,291

 
(16
)
(Income) loss from discontinued operations (net of tax)
 
$
(4,857
)
 
$
59


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

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

Results of Operations
 
 
Three Months Ended March 31,
 
 
2020

 
2019

 
 
(thousands of dollars)
Sales
 
$
17,937

 
$
20,664

Cost of sales
 
16,821

 
18,570

Gross profit
 
1,116

 
2,094

Selling, general, and administrative
 
2,680

 
2,738

Operating loss
 
(1,564
)
 
(644
)
Other income
 
17

 
428

Finance and interest expense
 
(531
)
 
(445
)
Loss before Zakat and income taxes
 
(2,078
)
 
(661
)
Zakat and income taxes
 
533

 
522

Net Loss
 
$
(2,611
)
 
$
(1,183
)

Financial Position
 
 
March 31,

 
December 31,

 
 
2020

 
2019

 
 
(thousands of dollars)
Current assets
 
$
44,189

 
$
45,354

Noncurrent assets
 
199,109

 
196,564

Total assets
 
$
243,298

 
$
241,918

 
 
 
 
 
Current liabilities
 
$
28,955

 
$
27,645

Long term liabilities
 
82,029

 
79,348

Stockholders' equity
 
132,314

 
134,925

 
 
$
243,298

 
$
241,918


Changes in Ownership

In the first quarter of 2020, we completed a portion of the Share Sale to an existing shareholder of AMAK. We sold 4 million shares of AMAK, thereby reducing our ownership percentage from 33.3% to 28.3%. As this transaction

 
 
 
8
 




occurred at the end of the first quarter, our portion of the equity in earnings/losses of AMAK reflected for the first quarter of 2020 is calculated at 33.3%, whereas our ownership of balance sheet accounts is reflected at 28.3% as of March 31, 2020.

In the second quarter of 2019, certain shareholders of AMAK transferred a portion of their shares to the CEO of AMAK as a one-time retention and performance bonus. The Company transferred 100,000 shares and the transaction reduced our ownership percentage from 33.4% to 33.3%.

The equity in the (losses) earnings of AMAK included in income (loss) from discontinued operations, net of tax, on the consolidated statements of operations for the three months ended March 31, 2020 and 2019, is comprised of the following:
 
 
Three Months Ended
March 31,
 
 
2020

 
2019

 
 
(thousands of dollars)
AMAK Net Loss
 
$
(2,611
)
 
$
(1,183
)
Percentage of Ownership
 
33.3
%
 
33.4
%
 
 
 
 
 
Company's share of loss reported by AMAK
 
$
(869
)
 
$
(395
)
Amortization of difference between Company's investment in AMAK and Company's share of net assets of AMAK
 
337

 
337

Equity in losses of AMAK
 
$
(532
)
 
$
(59
)

For additional information, see NOTE 6, "INVESTMENT IN AMAK AND DISCONTINUED OPERATIONS" to the consolidated financial statements set forth in our Annual Report on Form 10–K for the year ended December 31, 2019.

6. PREPAID EXPENSES AND OTHER ASSETS

Prepaid expenses and other assets consisted of the following:
 
 
March 31, 2020

 
December 31, 2019

 
 
(thousands of dollars)
Prepaid license
 
$
1,008

 
$
1,209

Spare parts
 
1,965

 
1,857

Insurance receivable
 
874

 
1,148

Other prepaid expenses and assets
 
611

 
733

Total prepaid expenses and other assets
 
$
4,458

 
$
4,947


7. PLANT, PIPELINE AND EQUIPMENT

Plant, pipeline and equipment consisted of the following:
 
 
March 31, 2020

 
December 31, 2019

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

 
$
1,580

Catalyst
 
4,225

 
4,095

Land
 
5,428

 
5,428

Plant, pipeline and equipment
 
260,892

 
258,651

Construction in progress
 
4,673

 
5,052

Total plant, pipeline and equipment
 
$
276,798

 
$
274,806

Less accumulated depreciation
 
(89,587
)
 
(85,887
)
Net plant, pipeline and equipment
 
$
187,211

 
$
188,919


Plant, pipeline, and equipment serve as collateral for our amended and restated credit agreement. See Note 11.

Labor capitalized for construction was approximately nil and $0.1 million for the three months ended March 31, 2020 and 2019, respectively.

Construction in progress during the first three months of 2020 included Advanced Reformer unit improvements and pipeline maintenance at SHR and equipment modifications at TC. Construction in progress during the first three months of 2019

 
 
 
9
 




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.

Amortization relating to the catalyst, which is included in cost of sales, was approximately $0.2 million and nil for the three months ended March 31, 2020 and 2019, respectively.

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 Condensed 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, 2020
 
Three Months Ended
March 31, 2019
Operating lease cost (a)
Cost of sales, exclusive of depreciation and amortization
$
920

 
$
1,139

Operating lease cost (a)
Selling, general and administrative
48

 
34

Total operating lease cost
 
$
968

 
$
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
 
$
968

 
$
1,173

 
 
 
 
 
(a) Short-term lease costs were approximately $0.1 million and $0.1 million during the periods, respectively.
The Company had no variable lease expense, as defined by ASC 842, during the periods.
($ in thousands)
Classification on the Condensed Consolidated Balance Sheets
March 31, 2020
 
December 31, 2019
Assets:
 
 
 
 
Operating
Operating lease assets
$
12,711

 
$
13,512

Finance
Property, plant, and equipment

 

Total leased assets
 
$
12,711

 
$
13,512

 
 
 
 
 
Liabilities:
 
 
 
 
Current
 
 
 
 
Operating
Current portion of operating lease liabilities
$
3,153

 
$
3,174

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

 

Noncurrent
 
 
 
 
Operating
Operating lease liabilities
9,558

 
10,338

Finance
Long-term debt

 

Total lease liabilities
 
$
12,711

 
$
13,512


 
 
 
10
 




($ in thousands)
Three Months Ended
March 31, 2020
 
Three Months Ended
March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 
 
 
Operating cash flows used for operating leases
$
947

 
$
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

 

 
March 31, 2020
Weighted-average remaining lease term (in years):
 
Operating leases
4.3

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, 2020, maturities of lease liabilities were as follows:
($ in thousands)
Operating Leases
 
Finance Leases
2020
$
2,756

 
$

2021
3,540

 

2022
3,218

 

2023
2,329

 

2024
1,026

 

Thereafter
1,082

 

Total lease payments
$
13,951

 
$

Less: Interest
1,240

 

Total lease obligations
$
12,711

 
$


9. INTANGIBLE ASSETS, NET

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, 2020
 
 
Gross
 
Accumulated Amortization
 
Net
 
 
(thousands of dollars)
Customer relationships
 
$
16,852

 
$
(6,179
)
 
$
10,673

Non-compete agreements
 
94

 
(94
)
 

Licenses and permits
 
1,471

 
(628
)
 
843

Developed technology
 
6,131

 
(3,372
)
 
2,759

Total
 
$
24,548

 
$
(10,273
)
 
$
14,275


 
 
 
11
 




 
 
December 31, 2019
 
 
Gross
 
Accumulated Amortization
 
Net
 
 
(thousands of dollars)
Customer relationships
 
$
16,852

 
$
(5,898
)
 
$
10,954

Non-compete agreements
 
94

 
(94
)
 

Licenses and permits
 
1,471

 
(601
)
 
870

Developed technology
 
6,131

 
(3,219
)
 
2,912

Total
 
$
24,548

 
$
(9,812
)
 
$
14,736


Amortization expense for intangible assets included in cost of sales for the three months ended March 31, 2020 and 2019 was approximately $0.5 million and $0.5 million, respectively.

Based on identified intangible assets that are subject to amortization as of March 31, 2020, we expect future amortization expenses for each period to be as follows:
 
 
Total

 
Remainder of 2020

 
2021

 
2022

 
2023

 
2024

 
2025

 
Thereafter

 
 
(thousands of dollars)
Customer relationships
 
$
10,673

 
$
843

 
$
1,123

 
$
1,123

 
1,123

 
1,123

 
1,123

 
$
4,215

Licenses and permits
 
843

 
79

 
101

 
86

 
86

 
86

 
86

 
319

Developed technology
 
2,759

 
460

 
613

 
613

 
613

 
460

 

 

Total future amortization expense
 
$
14,275

 
$
1,382

 
$
1,837

 
$
1,822

 
$
1,822

 
$
1,669

 
$
1,209

 
$
4,534


10. ACCRUED LIABILITIES

Accrued liabilities consisted of the following:
 
 
March 31, 2020

 
December 31, 2019

 
 
(thousands of dollars)
State taxes
 
$
247

 
$
215

Property taxes
 
940

 

Payroll
 
1,718

 
1,250

Royalties
 
409

 
273

Officer compensation
 
344

 
1,687

Legal
 
213

 

Foreign taxes
 
320

 

AMAK transaction costs
 
1,000

 
1,000

Other
 
1,529

 
1,315

Total
 
$
6,720

 
$
5,740


11. LIABILITIES AND LONG-TERM DEBT

Senior Secured Credit Facilities

As of March 31, 2020, we had $23.0 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 $79.8 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 $21 million of availability under our Revolving Facility at March 31, 2020. TOCCO’s ability to make additional borrowings under the

 
 
 
12
 




Revolving Facility at March 31, 2020 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)).

For each fiscal quarter after December 31, 2019, TOCCO must maintain a Consolidated Leverage Ratio of 3.50 to 1.00 (subject to temporary increase following certain acquisitions). TOCCO's Consolidated Leverage Ratio was 2.91 and 2.20 as of March 31, 2020 and December 31, 2019, respectively. Additionally, TOCCO must maintain a minimum Consolidated Fixed Charge Coverage Ratio as of the end of any fiscal quarter of 1.15 to 1.00. TOCCO's Consolidated Fixed Charge Coverage Ratio was 2.21 and 2.56 as of March 31, 2020 and December 31, 2019, respectively.

The maturity date for the ARC Agreement is July 31, 2023. As of March 31, 2020, the effective interest rate for the Credit Facilities was 3.83%. The ARC Agreement contains a number of customary affirmative and negative covenants and we were in compliance with those covenants as of March 31, 2020.

For a summary of additional terms of the Credit Facilities, see NOTE 13, “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, 2019.

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 $0.6 million and $0.6 million for the periods ended March 31, 2020 and December 31, 2019, have been netted against outstanding loan balances.

Long-term debt and long-term obligations are summarized as follows:
 
March 31, 2020
 
December 31, 2019
 
(thousands of dollars)
Revolving Facility
23,000

 
3,000

Term Loan Facility
79,844

 
80,938

Loan fees
(604
)
 
(649
)
Total long-term debt
102,240

 
83,289

 
 
 
 
Less current portion including loan fees
4,194

 
4,194

 
 
 
 
Total long-term debt, less current portion including loan fees
98,046

 
79,095


12. COMMITMENTS AND CONTINGENCIES

COVID-19

The global outbreak of COVID-19 presents various global risks. The full impact of the outbreak continues to evolve as of the date of this report. Management is actively monitoring the impact of the global situation on our financial condition, liquidity, operations, suppliers, industry, investments, and workforce. Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, the Company is not able to estimate the effects, if any, on its results of operations, financial condition, or liquidity for fiscal year 2020.

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 (the "Loan") to AMAK. As a condition of the Loan, SIDF required all stockholders of AMAK to execute personal or corporate guarantees. 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 our investment. On July 8, 2018, the Loan was amended to adjust the repayment schedule and extend the repayment terms through April 2024. Under the new payment terms the current

 
 
 
13
 




amount due in 2020 is SAR 50.0 million (US$13.3 million). In connection with the First Closing discussed in Note 5, our portion of the loan guarantee was effectively reduced to 33.1% or approximately SAR 95.7 million (US$24.3 million). The total amount outstanding on the Loan at March 31, 2020 was SAR 275.0 million (US$77.3 million). See additional discussion including release of the entire guarantee in connection with the Share Sale in Note 5.

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

In accordance with our supplier agreements, on a recurring monthly basis, the Company commits to purchasing a determined volume of feedstock in anticipation of upcoming requirements. Feedstock purchases are invoiced and recorded when they are delivered. As of March 31, 2020 and December 31, 2019, the value of the remaining undelivered feedstock approximated $2.7 million and $3.5 million, respectively.

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, 2020 and 2019, were $0.3 million and $0.2 million, respectively.

Environmental Remediation

Amounts charged to expense for various activities related to environmental monitoring, compliance, and improvements were approximately $0.3 million and $0.1 million for the three months ended March 31, 2020 and 2019, respectively.

13. 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.

Stock-based compensation expense of approximately $0.4 million and $0.2 million was recognized during the three months ended March 31, 2020 and 2019, 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, 2020 or 2019.


 
 
 
14
 




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, 2020
487,000

 
10.87
 
 
 
 
Granted

 

 
 
 
 
Exercised

 

 
 
 
 
Forfeited

 

 
 
 
 
Outstanding at March 31, 2020
487,000

 
10.87
 
3.5
 
$

Expected to vest

 
 
 
 
 
$

Exercisable at March 31, 2020
487,000

 
10.87
 
3.5
 
$


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, 2020, 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, 2020 and 2019, respectively, was $0.

The Company has no non-vested options as of March 31, 2020.

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, 2020
298,864

 
9.78
Granted
248,265

 
6.50

Forfeited

 

Vested
(36,268
)
 
6.32
Outstanding at March 31, 2020
510,861

 
9.80

Expected to vest
510,861

 
 

14. 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 February 2020 on the selection of our December 31, 2017 tax return for audit. In prior years, we received notification that Texas selected our R&D credit calculations for 2014 and 2015 for audit. The state of Texas had suspended their examination while they comprehensively reviewed their audit procedures for consistency. During the fourth quarter of 2019, we received notice that Texas had completed their review of their procedures and initiated additional requests for information. We do not expect any material changes related to the federal or Texas audits. Our federal and Texas tax returns remain open for examination for the years 2016 through 2019. As of March 31, 2020 and December 31, 2019, respectively, we recognized no adjustments 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, foreign taxes and a research and development credit for the three months ended March 31, 2020 and 2019. We

 
 
 
15
 




continue to maintain a valuation allowance against certain deferred tax assets, specifically for mining claims for PEVM, where realization is not certain.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") was enacted into law. The CARES Act allows for the deferral of income and social security tax payments, a five–year carryback for net operating losses ("NOLs"), changes to interest expense and business loss limitation rules, certain new tax credits, and certain new loans and grants to businesses. We have recognized the provisional amounts of $17.8 million for the NOLs carryback and they are included in the income tax receivable of $16.1 million. The Company will continue to evaluate the CARES Act for opportunities as additional information is released. See Subsequent Events disclosure at Note 19.

15. 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 Petrochemicals segment includes SHR and GSPL. Our Specialty Waxes segment is TC. We also separately identify our corporate overhead which includes administrative activities such as legal, accounting, consulting, investor relations, officer and director compensation, corporate insurance, and other administrative costs.

 
Three Months Ended March 31, 2020
 
Specialty Petrochemicals

 
Specialty Waxes

 
Corporate

 
Eliminations

 
Consolidated

 
(in thousands)
Product sales
$
50,386

 
$
6,797

 
$

 
$

 
$
57,183

Processing fees
1,244

 
3,640

 

 

 
4,884

Total revenues
51,630

 
10,437

 

 

 
62,067

Operating income (loss) before depreciation and amortization
6,490

 
1,066

 
(2,415
)
 

 
5,141

Operating income (loss)
3,872

 
(262
)
 
(2,422
)
 

 
1,188

Income (loss) from continuing operations before taxes
2,942

 
(242
)
 
(2,490
)
 

 
210

Depreciation and amortization
2,617

 
1,328

 
7

 

 
3,952

Capital expenditures
1,601

 
316

 

 

 
1,917

 
Three Months Ended March 31, 2019
 
Specialty Petrochemicals

 
Specialty Waxes

 
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 income (loss) before depreciation and amortization
11,407

 
(849
)
 
(2,305
)
 

 
8,253

Operating income (loss)
8,333

 
(2,197
)
 
(2,310
)
 

 
3,826

Income (loss) from continuing operations before taxes
7,135

 
(2,539
)
 
(2,292
)
 

 
2,304

Depreciation and amortization
3,074

 
1,348

 
20

 

 
4,442

Capital expenditures
1,378

 
509

 

 

 
1,887


 
 
 
16
 




 
March 31, 2020
 
Specialty Petrochemicals

 
Specialty Waxes

 
Corporate

 
Eliminations

 
Consolidated

 
(in thousands)
Trade receivables, product sales
$
20,556

 
$
4,079

 
$

 
$

 
$
24,635

Trade receivables, processing fees
811

 
2,950

 

 

 
3,761

Intangible assets, net

 
14,275

 

 

 
14,275

Total assets
293,382

 
91,674

 
120,689

 
(167,344
)
 
338,401

 
December 31, 2019
 
Specialty Petrochemicals

 
Specialty Waxes

 
Corporate

 
Eliminations

 
Consolidated

 
(in thousands)
Trade receivables, product sales
$
18,911

 
$
3,613

 
$

 
$

 
$
22,524

Trade receivables, processing fees
748

 
3,048

 

 

 
3,796

Intangible assets, net

 
14,736

 

 

 
14,736

Total assets
289,546

 
88,245

 
90,203

 
(166,175
)
 
301,819


16. NET INCOME PER COMMON SHARE

The following tables set forth the computation of basic and diluted net income (loss) per share for the three months ended March 31, 2020 and 2019, respectively.

Net Income per Common Share - Continuing Operations
 
 
Three Months Ended
March 31, 2020
 
Three Months Ended
March 31, 2019
 
 
Income

 
Shares

 
Per Share
Amount

 
Income

 
Shares

 
Per Share
Amount

 
 
(in thousands, except per share amounts)
Basic:
 
 
 
 
 
 
 
 
 
 
 
 
Net income from continuing operations
 
$
5,863

 
24,765

 
$
0.24

 
$
1,810

 
24,653

 
$
0.07

Unvested restricted stock units
 
 
 
511

 
 
 
 
 
374

 
 
Diluted:
 
 
 
 
 
 
 
 
 
 
 
 
Net income from continuing operations
 
$
5,863

 
25,276

 
$
0.23

 
$
1,810

 
25,027

 
$
0.07


Net Income Common Share - Discontinued Operations
 
 
Three Months Ended
March 31, 2020
 
Three Months Ended
March 31, 2019
 
 
Income

 
Shares

 
Per Share
Amount

 
Income (Loss)

 
Shares

 
Per Share
Amount

 
 
(in thousands, except per share amounts)
Basic:
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss) from discontinued operations, net of tax
 
$
4,857

 
24,765

 
$
0.20

 
$
(59
)
 
24,653

 
$

Unvested restricted stock units
 
 
 
511

 
 
 
 
 
374

 
 
Diluted:
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss) from discontinued operations, net of tax
 
$
4,857

 
25,276

 
$
0.19

 
$
(59
)
 
25,027

 
$


 
 
 
17
 





Net Income per Common Share
 
 
Three Months Ended
March 31, 2020
 
Three Months Ended
March 31, 2019
 
 
Income

 
Shares

 
Per Share
Amount

 
Income

 
Shares

 
Per Share
Amount

 
 
(in thousands, except per share amounts)
Basic:
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
10,720

 
24,765

 
$
0.44

 
$
1,751

 
24,653

 
$
0.07

Unvested restricted stock units
 
 
 
511

 
 
 
 
 
374

 
 
Diluted:
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
10,720

 
25,276

 
$
0.42

 
$
1,751

 
25,027

 
$
0.07


At March 31, 2020 and 2019, 487,000 and 552,000 shares of common stock, respectively, were issuable upon the exercise of options and warrants.

17. RELATED PARTY TRANSACTIONS

Consulting fees of approximately nil and $22,000 were incurred during the three months ended March 31, 2020 and 2019, respectively, from our Director, Nicholas Carter. Due to his history and experience with the Company and to provide continuity after his retirement, a consulting agreement was entered into with Mr. Carter in July 2015, which terminated effective December 31, 2019.

18. POST-RETIREMENT OBLIGATIONS

We currently have post-retirement obligations with two former executives. As of March 31, 2020 and December 31, 2019, approximately $0.3 million and $0.3 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, 2019.

19. SUBSEQUENT EVENTS

In connection with the CARES Act discussed in Note 14, we expect to file refund claims of approximately $17.8 million to recover taxes paid in 2013 through 2016. On April 30, 2020 we filed our first refund claims and expect to receive approximately $14.0 million in the third quarter.

On May 6, 2020, SHR and TC (collectively, the “Borrowers") received loan proceeds in an aggregate principal amount of approximately $6.1 million (the "SBA Loans") under the United States Small Business Administration Paycheck Protection Program (the "Paycheck Protection Program") established pursuant to CARES Act. The SBA Loans are evidenced by unsecured promissory notes (collectively, the “SBA Notes”), each payable to Bank of America, N.A. The Borrowers plan to use the SBA Loans to cover payroll costs and certain other eligible expenses in accordance with the relevant terms and conditions of the CARES Act. The SBA Notes mature on May 6, 2022, and bear interest at a stated rate of 1.0% per annum. The SBA Loans may be partially or fully forgiven if the Borrowers comply with the provisions of the CARES Act.

In connection with the SBA Loans, TOCCO, SHR, GSPL and TC (SHR, GSPL and TC collectively the “Guarantors”) entered into a Seventh Amendment to Amended and Restated Credit Agreement (the “Seventh Amendment”) related to the ARC Agreement on May 8, 2020. Pursuant to the Seventh Amendment certain amendments to the ARC Agreement were made to permit the SBA Loans and related matters.


 
 
 
18
 




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

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 involve known and unknown risks, uncertainties, assumptions, and other important factors that could cause the actual results, performance or our achievements, or industry results, to differ materially from historical results, any future results, or performance or achievements expressed or implied by such forward–looking statements. Such risks, uncertainties and factors include, but are not limited to: not completing, or not completely realizing the anticipated benefits from, the sale of our stake in AMAK; general economic and financial conditions domestically and internationally; insufficient cash flows from operating activities; our ability to attract and retain key employees; feedstock, product and mineral prices; feedstock availability and our ability to access third party transportation; competition; industry cycles; natural disasters or other severe weather events, health epidemics and pandemics (including COVID-19) and terrorist attacks; our ability to consummate extraordinary transactions, including acquisitions and dispositions, and realize the financial and strategic goals of such transactions; technological developments and our ability to maintain, expand and upgrade our facilities; regulatory changes; environmental matters; lawsuits; outstanding debt and other financial and legal obligations (including having to return the amounts borrowed under the Paycheck Protection Program or failing to qualify for forgiveness of such loans, in whole or in part); difficulties in obtaining additional financing on favorable conditions, or at all; local business risks in foreign countries, including civil unrest and military or political conflict, local regulatory and legal environments and foreign currency fluctuations; and other risks detailed 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 Securities and Exchange Commission (the "SEC"). Many of these risks and uncertainties are currently amplified by and will continue to be amplified by, or in the future may be amplified by, the COVID–19 pandemic.

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 releases, 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 condensed 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 custom manufacturing services.

The discussion and analysis of financial condition and the results of operations which appears below should be read in conjunction with "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the year ended December 31, 2019.

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

 
 
 
19
 




market; while the diversity of our custom processing assets and capabilities offers solutions to our customers that we believe are uncommon along the U.S. Gulf Coast.

Enabling our success in these businesses is a commitment to operational excellence which establishes a culture that prioritizes the safety of our employees and communities in which we operate, the integrity of our assets and regulatory compliance. 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 stockholders.

Review of First Quarter 2020 Results

We reported first quarter 2020 net income of $10.7 million, up from a net loss of $1.8 million in the first quarter of 2019. Diluted earnings per share are $0.42 for the first quarter of 2020, up from a loss per share of $0.07 for the same period in 2019. First quarter 2020 net income includes a benefit of approximately $7.9 million or $0.22 per diluted share, for an NOL tax benefit from the enactment of the CARES Act. Sales volume of our Specialty Petrochemicals products decreased 12.1% due to lower sales to the Canadian Oil Sands and lower overseas export sales. Specialty Waxes sales revenue was up 13.2% compared to the first quarter 2019 due to higher wax sales volume and higher custom processing revenues.

Consolidated Adjusted EBITDA from continuing operations was $5.5 million for the first quarter of 2020, compared with consolidated Adjusted EBITDA from continuing operations of $8.5 million in the first quarter of 2019. Consolidated Adjusted EBITDA from continuing operations declined due to lower prime product sales volume and prime product margins in our Specialty Petrochemicals segment, partially offset by higher wax sales volumes and higher custom processing revenues in our Specialty Waxes business.
COVID-19 Pandemic
The continued global impact of COVID-19 has resulted in various emergency measures to curb the spread of the virus. We continue to monitor the progression of the COVID-19 pandemic on a daily basis. Our guiding principle is, and has always been, the protection of our people and the communities in which we work, as well as maintaining the overall integrity of our assets. While our essential plant personnel remain on-site, many of our other employees are working remotely. We are continuing to follow the orders and guidance of Federal, state, and local governmental agencies, as we maintain our own stringent protocols in an effort to mitigate the spread of the virus and protect the health of our employees, customers, and suppliers as well as the communities in which we work. As an organization, we adopted social distancing behaviors early, executed the necessary changes to enable all possible job duties to be performed remotely and rapidly identified and executed the necessary adjustments to support optimal productivity for all remote workers.
To date, our plants have continued to operate as normal, and our supply chain has generally remained intact, with adequate availability of raw materials. Importantly, under the U.S. Department of Homeland Security guidance issued on March 28, 2020, as well as many related state and local governmental orders, chemical manufacturing sites are considered essential critical infrastructure, and as such, are not currently subject to closure in the locations where we operate. Although there has been some disruption in global logistics channels, we have not experienced significant delays in fulfillment of customer orders.
While the COVID–19 pandemic had a limited impact on our business, results of operations, financial position and liquidity for the first quarter of 2020, we are seeing reduced demand in certain end markets in the second quarter, in particular, durable consumer goods, which demand decrease we attribute to the COVID–19 pandemic. This weakened demand in certain end markets is likely to continue in the near-term and may continue for the remainder of 2020, and could spread more broadly to our other end markets, depending on the magnitude and duration of the impact of the COVID-19 pandemic. As a result, we are unable to accurately predict the impact that the pandemic for the remainder of 2020 and, potentially, beyond (including how the impact of the pandemic may change from quarter to quarter). However, we believe our long–term demand thereafter remains intact.

Our management will continue to actively monitor the impact of the global situation on our business, results of operations, financial condition, liquidity, suppliers, industry, investments, and workforce. We do not currently anticipate any material impairments, with respect to intangible assets, long–lived assets, or right of use assets, increases in allowances for credit losses from our customers, restructuring charges, other expenses, or changes in accounting judgments to have a material

 
 
 
20
 




impact on our condensed consolidated financial statements, however at this point we are continuing to assess the impact, if any.

Non-GAAP Financial Measures

We include in this Quarterly Report on Form 10-Q the non-GAAP financial measures of EBITDA from continuing operations and Adjusted EBITDA from continuing operations 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.

We define EBITDA from continuing operations as net income (loss) from continuing operations plus interest expense (benefit), income taxes, depreciation and amortization. We define Adjusted EBITDA from continuing operations as EBITDA from continuing operations plus share–based compensation, plus restructuring and severance expenses, plus or minus equity in AMAK's earnings and losses, plus impairment losses and plus or minus gains or losses on disposal of assets.

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 from continuing operations and Adjusted EBITDA from continuing operations.
 
Three Months Ended
March 31, 2020
 
Specialty Petrochemicals
 
Specialty Waxes
 
Corporate
 
Consolidated
 
(in thousands)
Net Income
$
4,596

 
$
1,214

 
$
4,910

 
$
10,720

Income from discontinued operations, net of tax

 

 
4,857

 
4,857

Income from continuing operations
$
4,596

 
$
1,214

 
$
53

 
$
5,863

Interest
915

 

 
1

 
916

Income tax benefit
(1,654
)
 
(1,456
)
 
(2,543
)
 
(5,653
)
Depreciation and amortization
186

 
24

 
6

 
216

Depreciation and amortization in cost of sales
2,431

 
1,305

 

 
3,736

EBITDA from continuing operations
$
6,474

 
$
1,087

 
$
(2,483
)
 
$
5,078

Stock-based compensation

 

 
390

 
390

(Gain) Loss on disposal of assets
(1
)
 
17

 

 
16

Adjusted EBITDA from continuing operations
$
6,473

 
$
1,104

 
$
(2,093
)
 
$
5,484


 
 
 
21
 




 
Three Months Ended
March 31, 2019
 
Specialty Petrochemicals
 
Specialty Waxes
 
Corporate
 
Consolidated
 
(in thousands)
Net Income (Loss)
$
6,142

 
$
(2,539
)
 
$
(1,852
)
 
$
1,751

Loss from discontinued operations, net of tax

 

 
(59
)
 
(59
)
Income (Loss) from continuing operations
$
6,142

 
$
(2,539
)
 
$
(1,793
)
 
$
1,810

Interest
1,195

 
304

 

 
1,499

Income tax expense (benefit)
994

 

 
(500
)
 
494

Depreciation and amortization
169

 
24

 
20

 
213

Depreciation and amortization in cost of sales
2,905

 
1,324

 

 
4,229

EBITDA from continuing operations
$
11,405

 
$
(887
)
 
$
(2,273
)
 
$
8,245

Stock-based compensation

 

 
213

 
213

Adjusted EBITDA from continuing operations
$
11,405

 
$
(887
)
 
$
(2,060
)
 
$
8,458


Liquidity and Capital Resources

Working Capital

Our approximate working capital days are summarized as follows:
 
March 31, 2020

 
December 31, 2019

 
March 31, 2019

Days sales outstanding in accounts receivable
41.6

 
37.1

 
35.6

Days sales outstanding in inventory
12.3

 
19.2

 
23.4

Days sales outstanding in accounts payable
14.8

 
20.6

 
16.0

Days of working capital
39.1

 
35.7

 
43.0

Our days sales outstanding in accounts receivable at March 31, 2020 was 41.6 days compared to 37.1 days at December 31, 2019, driven by higher Specialty Waxes sales volumes in the quarter. Our days sales outstanding in inventory decreased by approximately 6.9 days from December 31, 2019, driven by lower inventory values based on reduced feedstock prices. Our days sales outstanding in accounts payable decreased due to a reduced payable to our feedstock supplier driven by lower feedstock prices, as well as payments to vendors in the first quarter of 2020 for costs associated with the weather event in the fourth quarter of 2019. Since days of working capital is calculated using the above three metrics, it increased for the aforementioned reasons discussed.

Our cash balance at March 31, 2020 was $37.5 million, an increase of $31.3 million from same period in 2019. Our cash balance includes borrowings of $20.0 million under our Revolving Facility and $10.1 million of proceeds from the sale of AMAK shares to Arab Mining Company.

The change in cash is summarized as follows:
 
 
Three Months Ended
March 31,
 
 
2020

 
2019

Net cash provided by (used in)
 
(thousands of dollars)
Operating activities
 
$
4,301

 
$
824

Investing activities
 
8,098

 
(1,417
)
Financing activities
 
18,906

 
691

Increase in cash
 
$
31,305

 
$
98

Cash
 
$
37,450

 
$
6,833



 
 
 
22
 




Operating Activities
Cash provided by operating activities totaled $4.3 million for the first three months of 2020, $3.5 million higher than the corresponding period in 2019. For the first three months of 2020 net income increased by approximately $9.0 million as compared to the corresponding period in 2019. Major non-cash items affecting income in the first three months of 2020 included changes in depreciation and amortization of $4.0 million, deferred taxes of $10.4 million and stock-based compensation of $0.4 million. Major non-cash items affecting income in the first three months of 2019 included deferred taxes of $0.4 million and depreciation and amortization of $4.4 million.

Additional factors leading to an increase in cash provided by operating activities included:

Under the CARES Act, enacted in the first quarter of 2020, we recorded an income tax receivable related to the carryback of NOL claims. This resulted in an increase in our income tax receivable of approximately $16.1 million. On April 30, 2020 we filed our first refund claims and expect to receive approximately $14.0 million in the third quarter.

Trade receivables increased approximately $2.1 million. This is due to timing of sales within the quarter and we do not expect any collection issues at this time.

Inventories decreased approximately $5.3 million driven by lower inventory values associated with the decline in feedstock prices.

Accounts payable and accrued liabilities decreased $3.7 million primarily due to a reduced payable to our feedstock supplier driven by lower feedstock prices, as well as payments to vendors in the first quarter of 2020 for costs associated with the weather event in the fourth quarter of 2019.

Investing Activities

Cash provided by investing activities during the first three months of 2020 was approximately $8.1 million, representing an increase of approximately $9.5 million from the corresponding period of 2019. The primary source of the funds provided by investing activities was $10.2 million of proceeds, net of the deposit previously paid, received in connection with the sale of our investment in AMAK discussed in Note 5 offset by additions of plant, pipeline and equipment of approximately $2.1 million.

Financing Activities

Cash provided by financing activities during the first three months of 2020 was approximately $18.9 million versus cash provided by financing activities of $0.7 million during the corresponding period of 2019. As a precautionary measure during this period of uncertainty, we borrowed $20.0 million dollars on our Revolving Facility in March 2020. In the first quarter of 2020, we also made principal payments on our outstanding Credit Facilities of $1.1 million. During the first quarter of 2019, we made principal payments on our outstanding Credit Facilities of $1.1 million. We drew $2.0 million on our line of credit for working capital purposes in the first three months of 2019.

Anticipated Cash Needs

The COVID–19 pandemic has resulted in significant economic uncertainty and market volatility. In response, we have taken steps to address our liquidity needs during this uncertain period, including the completion of the First Closing, precautionary borrowings under the Revolving Facility and participation in certain provisions of the CARES Act, including certain changes to U.S. tax law and borrowings under the SBA Loans that we believe will be essential to support the continuity of our workforce. As a result, we believe, given current business conditions, the Company is capable of supporting its operating requirements and capital expenditures through internally generated funds supplemented with cash on our balance sheet and additional borrowings under our ARC Agreement. We will also continue to monitor government economic stabilization efforts in response to the COVID–19 pandemic and may in the future participate in additional legislative provisions under the CARES Act, or similar legislation, to enhance our liquidity.


Results of Operations

Comparison of Three Months Ended March 31, 2020 and 2019

Specialty Petrochemicals Segment

 
 
 
23
 




 
 
Three Months Ended March 31,
 
 
2020

 
2019

 
Change

 
% Change

 
 
(thousands of dollars)
Specialty Petrochemicals Product Sales
 
$
50,386

 
$
55,490

 
$
(5,104
)
 
(9.2
)%
Processing
 
1,244

 
1,383

 
(139
)
 
(10.1
)%
Gross Revenue
 
$
51,630

 
$
56,873

 
$
(5,243
)
 
(9.2
)%
 
 
 
 
 
 
 
 
 
Volume of Sales (gallons)
 
 
 
 
 
 
 
 
Specialty Petrochemicals Products
 
19,741

 
22,468

 
(2,727
)
 
(12.1
)%
Prime Product Sales
 
16,218

 
17,638

 
(1,420
)
 
(8.1
)%
 
 
 
 
 
 
 
 
 
Cost of Sales
 
$
44,796

 
$
45,866

 
(1,070
)
 
(2.3
)%
Gross Margin
 
13.2
%
 
19.4
%
 
 
 
(6.2
)%
Total Operating Expense*
 
16,740

 
18,280

 
(1,540
)
 
(8.4
)%
Natural Gas Expense*
 
927

 
1,383

 
(456
)
 
(33.0
)%
Operating Labor Costs*
 
2,790

 
3,703

 
(913
)
 
(24.7
)%
Transportation Costs*
 
4,887

 
7,048

 
(2,161
)
 
(30.7
)%
General & Administrative Expense
 
2,776

 
2,475

 
301

 
12.2
 %
Depreciation and Amortization**
 
2,617

 
3,074

 
(457
)
 
(14.9
)%
Capital Expenditures
 
1,601

 
1,378

 
223

 
16.2
 %
* Included in cost of sales
**Includes $2,431 and $2,905 for 2020 and 2019, respectively, which is included in operating expense

Gross Revenue

Gross Revenue for our Specialty Petrochemicals segment decreased during the first quarter 2020 from the first quarter 2019 by 9.2% primarily due to lower sales volumes for prime products and byproducts. This was partially offset by higher selling prices resulting from higher feedstock costs.

Specialty Petrochemicals Product Sales

Specialty Petrochemicals product sales declined approximately 9.2% during the first quarter 2020 from the first quarter 2019. Prime products sales volume declined approximately 1.4 million gallons or 8.1% from the first quarter 2020 due to lower sales to the Canadian oil sands and lower overseas export sales. Sales to other end use markets remained solid in the first quarter 2020 adjusted for market seasonality. The sales outlook to the Canadian oil sands continues to remain uncertain due to the government mandated crude production curtailments in Canada and the crude oil pricing environment. By-product sales volumes in first quarter 2020 declined 27% compared to the first quarter 2019 partially due to lower prime product production. 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 decreased to 22.8% of total Specialty Petrochemicals volume in the first quarter for 2020 from 25.1% in the first quarter 2019. Foreign sales volume includes sales to the Canadian oil sands.

Processing

Processing revenues were relatively flat at $1.2 million and $1.4 million for the first quarter 2020 and 2019, respectively.

Cost of Sales (includes but is not limited to raw materials and total operating expense)

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 is highly correlated with the price of crude oil. Our Advanced Reformer unit upgrades the by-product stream produced as a result of prime product production. This upgrade allows us to sell our by-products at higher prices than would be possible without the Advanced Reformer unit.


 
 
 
24
 




Cost of Sales declined 2.3% during the first quarter 2020 from the first quarter 2019. Lower operating expenses including lower natural gas, labor and transportation costs were partially offset by higher cost of materials in the first quarter 2020 compared to first quarter 2019. Benchmark Mount Belvieu natural gasoline feedstock price declined 18% from $1.15 per gallon in first quarter 2019 to $0.94 per gallon in the first quarter 2020. However, our cost of materials were higher in the first quarter of 2020 compared to the first quarter of 2019 as we sold higher cost inventory.

The gross margin percentage for the Specialty Petrochemicals segment decreased from 19.4% in the first quarter of 2019 to 13.2% in the first quarter of 2020 driven by higher cost of materials.

Total Operating Expense (includes but is not limited to natural gas, operating labor, depreciation and transportation)

Total Operating Expense decreased $1.5 million, or 8.4%, during the first quarter 2020 from the same period in 2019. Operating expense in the quarter benefited from lower labor costs, lower natural gas costs and lower transportation costs.

Capital Expenditures

Capital expenditures in the first quarter 2020 were approximately $1.6 million compared to $1.4 million in the first quarter of 2019.

 
 
 
25
 




Specialty Waxes Segment
 
 
Three Months Ended March 31,
 
 
2020

 
2019

 
Change

 
% Change

 
 
(thousands of dollars)
Product Sales
 
$
6,797

 
$
6,003

 
$
794

 
13.2
 %
Processing
 
3,640

 
2,279

 
1,361

 
59.7
 %
Gross Revenue
 
$
10,437

 
$
8,282

 
$
2,155

 
26.0
 %
 
 
 
 
 
 
 
 
 
Volume of specialty wax sales (thousand pounds)
 
10,174

 
7,882

 
2,292

 
29.1
 %
 
 
 
 
 
 
 
 
 
Cost of Sales
 
$
9,193

 
$
9,216

 
$
(23
)
 
(0.2
)%
Gross Margin (Loss)
 
11.9
%
 
(11.3
)%
 
 
 
23.2
 %
General & Administrative Expense
 
1,483

 
1,269

 
214

 
16.9
 %
Depreciation and Amortization*
 
1,328

 
1,348

 
(20
)
 
(1.5
)%
Capital Expenditures
 
$
316

 
$
509

 
$
(193
)
 
(37.9
)%
*Includes $1,524 and $1,327 for 2020 and 2019, respectively, which is included in cost of sales

Product Sales

Specialty Wax Segment product sales revenue increased 13.2% during the first quarter 2020 from the first quarter 2019 as specialty wax sales volume increased 29.1% or nearly 2.3 million pounds. In the first quarter 2019 wax sales were constrained by reduced production due to disruptions of wax feed supply from a key supplier as well as a planned outage at our Pasadena, Texas facility. Our wax feed is based on certain by-products produced as a result of polyethylene production at major polyethylene producers' facilities on the US Gulf Coast.

Processing

Processing revenues were $3.6 million in the first quarter 2020, a 59.7% or about $1.4 million increase from the first quarter 2019. The increase was due to significantly improved operation of the hydrogenation/distillation unit as well as strong revenues from other custom processing customers. As a result of a number of equipment and operating enhancements made to the hydrogenation/distillation unit, its reliability has improved significantly in recent months.

Cost of Sales

Cost of Sales were relatively flat in the first quarter 2020 compared to first quarter 2019.

Depreciation

Depreciation for the first quarter 2020 was $1.3 million, relatively flat from first quarter 2019.

Capital Expenditures

Capital Expenditures were approximately $0.3 million in the first quarter 2020 compared with $0.5 million in the first quarter of 2019.

Corporate Segment
 
 
Three Months Ended March 31,
 
 
2020

 
2019

 
Change

 
% Change

 
 
(thousands of dollars)
 
 
General & Administrative Expense
 
$
2,415

 
$
2,252

 
$
163

 
7.2
%

General corporate expenses increased by $0.2 million during the first quarter 2020 from the first quarter 2019. The increase is primarily attributable to stock-based compensation.

Investment in AMAK - Discontinued Operations
 
 
Three Months Ended March 31,
 
 
2020

 
2019

 
Change

 
% Change

 
 
(thousands of dollars)
 
 
Equity in losses of AMAK
 
$
(532
)
 
$
(59
)
 
$
(473
)
 
801.7
%

Equity in losses of AMAK increased during the first quarter 2020 from the first quarter 2019. The equity in losses were primarily impacted by reduced sales resulting from a decrease in metal prices during the quarter.

AMAK Summarized Income Statement

 
 
Three Months Ended
March 31,
 
 
2020
 
2019
 
 
(thousands of dollars)
Sales
 
$
17,937

 
$
20,664

Cost of sales
 
16,821

 
18,570

Gross profit
 
1,116

 
2,094

Selling, general, and administrative
 
2,680

 
2,738

Operating loss
 
(1,564
)
 
(644
)
Other income
 
17

 
428

Finance and interest expense
 
(531
)
 
(445
)
Loss before Zakat and income taxes
 
(2,078
)
 
(661
)
Zakat and income taxes
 
533

 
522

Net Loss
 
$
(2,611
)
 
$
(1,183
)
 
 
 
 
 
Finance and interest expense
 
531

 
445

Depreciation and amortization
 
7,329

 
7,325

Zakat and income taxes
 
533

 
522

EBITDA
 
$
5,782

 
$
7,109


Approximately 15,000 dry metric tons (dmt) of copper and zinc concentrate were shipped in the first quarter 2020 as compared to 14,000 dmt of copper and zinc concentrate in the first quarter 2019. Copper prices declined 26% from first quarter 2019 to first quarter 2020 which was the primary factor in the decline of EBITDA of approximately $1.3 million relative to the first quarter 2019.

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, 2019. 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, 2019.


 
 
 
26
 




Critical Accounting Policies and Estimates

Critical accounting policies are more fully described in Note 2, “RECENT ACCOUNTING PRONOUNCEMENTS” to the consolidated financial statements set forth in our Annual Report on Form 10-K for the year ended December 31, 2019. 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, 2019. For the three months ended March 31, 2020, there were no significant changes to these policies.

Recent and New Accounting Standards

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

Off Balance Sheet Arrangements

Off balance sheet arrangements as defined by the SEC means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with the registrant is a party, under which the registrant has (i) obligations under certain guarantees or contracts, (ii) retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangements, (iii) obligations under certain derivative arrangements, and (iv) obligations arising out of a material variable interest in an unconsolidated entity. Our guarantee for AMAK's debt is considered an off balance sheet arrangement. Please see further discussion in Note 5 to the Condensed Consolidated Financial Statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

For quantitative and qualitative disclosure about market risk, see Part II, Item 7A, "Quantitative and Qualitative Disclosures about Market Risk" in our Annual Report on Form 10–K for the year ended December 31, 2019. There have been no material changes in the Company's exposure to market risk from the disclosure included in such report.

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, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 
 
 
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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.

Readers of this Quarterly Report on Form 10–Q should carefully consider the risks described in the Company's other reports and filings filed with or furnished to the SEC, including the Company's prior and subsequent reports on Forms 10–K, 10–Q and 8–K, in connection with any evaluation of the Company's financial position, results of operations and cash flows.

The risks and uncertainties in the Company's most recent Annual Report on Form 10–K are not the only risks that the Company faces. Additional risks and uncertainties not presently known or those that are currently deemed immaterial may also affect the Company's operations. Any of the risks, uncertainties, events or circumstances described therein could cause the Company's future financial condition, results of operations or cash flows to be adversely affected. 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, 2019, except as noted below.

Our substantial indebtedness could limit cash flow available for our operations and could adversely affect our ability to service debt or obtain additional financing if necessary.

As of March 31, 2020, we had $23.0 million in borrowings outstanding under the Revolving Facility and $79.8 million in borrowings outstanding under the Term Loan Facility. Pursuant to the terms of the ARC Agreement, we also have the option, at any time, to request an increase to the commitment under the Revolving Facility and/or the Term Loan Facility by an additional amount of up to $50.0 million in the aggregate, subject to lenders acceptance of the increased commitment and other conditions.

Although the agreements governing our existing indebtedness contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of important exceptions, and additional indebtedness that we may incur from time to time to finance projects or for other reasons in compliance with these restrictions could be substantial. If we incur significant additional indebtedness, the related risks that we face could increase.

For example, in May 2020, SHR and TC received loan proceeds in an aggregate principal amount of approximately $6.1 million under the SBA Loans, which may be partially or fully forgiven if we comply with the provisions of the CARES Act. However, since the enactment of the CARES Act, the Small Business Administration (the “SBA”) and the Treasury Department (“Treasury”) have issued numerous rules and additional guidance to implement the Paycheck Protection Program, which continue to develop and change. As a result of this rapidly changing regulatory environment, it is difficult to determine and predict with certainty eligibility and available benefits under the Paycheck Protection Program. 

In particular, while we plan to use the proceeds of the SBA Loans in a way that will maximize the potential for forgiveness of the SBA Loan obligations, the SBA has not issued final regulations concerning the terms and conditions required for the forgiveness of the SBA Loans.  As a result, no assurance can be provided that we will obtain forgiveness of the SBA Loans in whole or in part. If we are not successfully in obtaining forgiveness of all or a portion of the SBA Loans, the unforgiven portion of such indebtedness would remain outstanding. In addition, on April 23, 2020, the SBA issued guidance that creates uncertainty as to whether a borrower can qualify to participate in the Paycheck Protection Program when it may have access to other sources of liquidity, such as a public company with substantial market value and access to capital markets. Subsequently, on April 28, 2020, the Secretary of the Treasury and the SBA announced that the government will review all Paycheck Protection Program loans of more than $2 million for which the borrower applies for forgiveness. If we were to be audited and receive an adverse finding in such audit, we could be required to return the full amount of the SBA Loans, which could reduce our liquidity and increase our cash requirements, and, potentially, subject us to fines, penalties and reputational costs.


 
 
 
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Our current, or any future, indebtedness (including any unforgiven portion of the SBA Loans) could:

limit our flexibility in planning for, or reacting to, changes in the markets in which we compete;
place us at a competitive disadvantage relative to our competitors with less indebtedness;
limit our ability to reinvest in our business;
render us more vulnerable to general adverse economic, regulatory and industry conditions; and
require us to dedicate a substantial portion of our cash flow to service our indebtedness.

Our ability to meet our cash requirements, including our debt service obligations, is dependent upon our ability to maintain our operating performance, which will be subject to general economic and competitive conditions and to financial, business and other factors, many of which are beyond our control. We cannot provide assurance that our business will generate sufficient cash flow from operations to fund our cash requirements and debt service obligations.

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

Issuer Purchases of Equity Securities
Period
(a)
Total Number of Shares (or Units) Purchased(1)

 
(b)
Average Price Paid Per Share (or Unit)(1)

 
(c)
Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs

 
(d)
Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs

January 1, 2020 - January 31, 2020

 
$

 

 

February 1, 2020 - February 29, 2020
5,238

 
6.49

 

 

March 1, 2020 - March 31, 2020
833

 
4.57

 

 

Total
6,071

 
$
6.23

 

 

(1) Represents shares of our common stock withheld for satisfaction of tax liabilities of a holder of restricted shares. The value of such shares was calculated based on the closing price of our common stock on the New York Stock Exchange on the date when the withholding was made.

ITEM 5. OTHER INFORMATION.

SBA Loans

On May 6, 2020, the Borrowers received loan proceeds in an aggregate principal amount of approximately $6.1 million under the SBA Loans through the Paycheck Protection Program established pursuant to Cares Act. The SBA Loans are evidenced by the SBA Notes. The Borrowers plan to use the SBA Loans to cover payroll costs and certain other eligible expense in accordance with the relevant terms and conditions of the CARES Act.

The SBA Notes each mature on May 6, 2022, and bear interest at a stated rate of 1.0% per annum. Monthly principal and interest payments, less the amount of any potential forgiveness, will commence on November 6, 2020. The SBA Loans may be partially or fully forgiven if the Borrowers comply with the provisions of the CARES Act, including with respect to the use of proceeds to cover payroll costs and other eligible expenses. The SBA Notes provide for customary events of default, including, among others, failure to timely repay the SBA Loan obligations, bankruptcy and breaches of representations and warranties. The Borrowers may prepay the principal of the SBA Loans at any time without incurring any prepayment charges.

The foregoing description does not purport to be complete and is subject to, and qualified in its entirety by, the full text of the SBA Notes, copies of which will be filed with the Company’s Quarterly Report on Form 10–Q for the quarterly period ended June 30, 2020.


 
 
 
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Seventh Amendment to ARC Agreement

On May 8, 2020, TOCCO and the Guarantors entered into a Seventh Amendment to the ARC Agreement. Pursuant to the Seventh Amendment, certain amendments were made to the terms of the Credit Agreement, including, among other things, to (a) permit the incurrence of additional indebtedness in the form of the SBA Loans and (b) exclude the SBA Loans from the calculation of the Consolidated Leverage Ratio until such time that any portion of the SBA Loans are not forgiven in accordance with the CARES Act.

The foregoing description does not purport to be complete and is subject to, and qualified in its entirety by, the full text of the Seventh Amendment, a copy of which will be filed with the Company’s Quarterly Report on Form 10–Q for the quarterly period ended June 30, 2020.

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. Exhibits marked with a plus sign (+) are management contracts or a compensatory plan, contract or arrangement.
Exhibit
Number
Description
2.1
2.2*
10.1+
10.2*+
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



 
 
 
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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 8, 2020
By:
 /s/ Sami Ahmad
 
 
Sami Ahmad
 
 
Principal Financial Officer and Duly Authorized Officer


 
 
 
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