See notes to consolidated financial statements.
TRECORA RESOURCES AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) |
| | | | | | | | |
| | | NINE MONTHS ENDED
SEPTEMBER 30, |
| | | 2019 | | 2018 |
| | | (thousands of dollars) |
| OPERATING ACTIVITIES | | | | |
| Net Income | | $ | 4,736 |
| | $ | 2,958 |
|
| Loss from Discontinued Operations | | (1,120 | ) | | (531 | ) |
| Income from Continuing Operations | | $ | 5,856 |
| | $ | 3,489 |
|
| Adjustments to Reconcile Income from Continuing Operations To Net Cash Provided by Operating Activities: | | | | |
| Depreciation and Amortization | | 10,863 |
| | 8,614 |
|
| Amortization of Intangible Assets | | 1,396 |
| | 1,396 |
|
| Stock-based Compensation | | 904 |
| | 1,002 |
|
| Deferred Income Taxes | | 1,268 |
| | 1,116 |
|
| Postretirement Obligation | | (28 | ) | | (817 | ) |
| Bad Debt Expense | | (19 | ) | | 152 |
|
| Amortization of Loan Fees | | 136 |
| | 216 |
|
| Loss on Extinguishment of Debt | | — |
| | 315 |
|
| Changes in Operating Assets and Liabilities: | | | | |
| Decrease (Increase) in Trade Receivables | | 1,634 |
| | (4,160 | ) |
| Increase in Insurance Receivables | | — |
| | (391 | ) |
| Decrease in Taxes Receivable | | — |
| | 4,029 |
|
| Decrease in Inventories | | 3,253 |
| | 622 |
|
| Increase in Prepaid Expenses and Other Assets | | 914 |
| | (1,592 | ) |
| Decrease in Accounts Payable and Accrued Liabilities | | (6,031 | ) | | (2,977 | ) |
| Decrease in Other Liabilities | | 267 |
| | 96 |
|
| Net Cash Provided by Operating Activities - Continuing Operations | | 20,413 |
| | 11,110 |
|
| Net Cash Used in Operating Activities - Discontinued Operations | | (164 | ) | | — |
|
| Net Cash Provided by Operating Activities | | 20,249 |
| | 11,110 |
|
| INVESTING ACTIVITIES | | | | |
| Additions to Plant, Pipeline and Equipment | | (6,978 | ) | | (19,090 | ) |
| Proceeds from PEVM | | 27 |
| | — |
|
| Net Cash Used in Investing Activities - Continuing Operations | | (6,951 | ) | | (19,090 | ) |
| Net Cash Provided by (Used in) Investing Activities - Discontinued Operations | | 2,697 |
| | (114 | ) |
| Net Cash Used in Investing Activities | | (4,254 | ) | | (19,204 | ) |
| FINANCING ACTIVITIES | | | | |
| Net Cash (Paid) Received Related to Stock-Based Compensation | | (292 | ) | | 441 |
|
| Additions to Long-Term Debt | | 2,000 |
| | 18,177 |
|
| Repayments of Long-Term Debt | | (15,281 | ) | | (12,260 | ) |
| Net Cash (Used in) Provided by Financing Activities - Continuing Operations | | (13,573 | ) | | 6,358 |
|
| NET INCREASE (DECREASE) IN CASH | | 2,422 |
| | (1,736 | ) |
| CASH AT BEGINNING OF PERIOD | | 6,735 |
| | 3,028 |
|
| CASH AT END OF PERIOD | | $ | 9,157 |
| | $ | 1,292 |
|
| Supplemental disclosure of cash flow information: | | |
| Cash payments for interest | | $ | 3,749 |
| | $ | 2,663 |
|
| Cash payments for taxes, net of refunds | | $ | 53 |
| | $ | 209 |
|
| Supplemental disclosure of non-cash items: | | | | |
| Capital expansion amortized to depreciation expense | | $ | 426 |
| | $ | 573 |
|
| Foreign taxes paid by AMAK | | $ | 891 |
| | $ | — |
|
| Stock exchange (Note 16) | | $ | — |
| | $ | 131 |
|
See notes to consolidated financial statements.
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) | TREC – Trecora Resources |
| |
(2) | TOCCO – Texas Oil & Chemical Co. II, Inc. – Wholly owned subsidiary of TREC and parent of SHR and TC |
| |
(3) | SHR – South Hampton Resources, Inc. – Specialty Petrochemicals segment and parent of GSPL |
| |
(4) | GSPL – Gulf State Pipe Line Co, Inc. – Pipeline support for the Specialty Petrochemicals segment |
| |
(5) | TC – Trecora Chemical, Inc. – Specialty Waxes segment |
| |
(6) | AMAK – Al Masane Al Kobra Mining Company – Held-for-sale mining equity investment – 33% ownership |
| |
(7) | PEVM – Pioche Ely Valley Mines, Inc. – Inactive mine – 55% ownership |
a.TOCCO – Texas Oil & Chemical Co. II, Inc. – Wholly owned subsidiary of TREC and parent of SHR and TC
b.SHR – South Hampton Resources, Inc. – Specialty Petrochemicals segment and parent of GSPL
c.GSPL – Gulf State Pipe Line Co, Inc. – Pipeline support for the Specialty Petrochemicals segment
d.TC – Trecora Chemical, Inc. – Specialty Waxes segment
e.PEVM – Pioche Ely Valley Mines, Inc. – Inactive mine – 55% ownership
f.AMAK – Al Masane Al Kobra Mining Company – Held-for-sale mining equity investment & discontinued operations
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, 2018.2019.
The unaudited condensed consolidated 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 nine months ended September 30, 20192020 are not necessarily indicative of results for the year ending December 31, 2019.2020.
We currently operate in two2 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, on September 28, 2020, we own a 33%completed the final closing of the sale of our ownership interest in AMAK, a Saudi Arabian closed joint stock company, which owns, operates and is developing mining assets in Saudi Arabia. Our investment iswas classified as held-for-sale and and the equity in earnings (losses) are recorded in discontinued operations. See Notes 16 and 19.Note 5 for additional discussion.
2. RECENT ACCOUNTING PRONOUNCEMENTS
Recently Adopted Accounting Standards Adopted in 2019Pronouncements
In February 2016, theEffective January 1, 2020, we adopted Financial Accounting StandardsStandard Board ("FASB") issued ASU 2016-02, Leases (Topic 842)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 amendeddefined by ASU 2017-13, 2018-01, 2018-10, 2018-11, and 2019-01, in order to increase transparency and comparability among organizationsthe standard, are impacted by recognizing lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under prior GAAP and disclosing key information about leasing arrangements. The new standard requires that a lessee should recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term on the balance sheet. The Company adopted ASC 842 in the first quarter of 2019 utilizing the modified retrospective transition approach. The Company has elected (1) the package of practical expedients,
which permits it notimmediate recognition of estimated credit losses in the financial statements, reflecting the net amount expected to reassess under the new standard its prior conclusions about lease identification, lease classification, and initial direct costs for any existing leases as of the adoption date, and (2) the hindsight practical expedient when determining lease term and assessing impairment of right-of-use assets. In addition, the Company elected the practical expedients related to (1) certain classes of underlying asset to not separate non-lease components from lease components and (2) the short-term lease recognition exemption for all leases that qualify.be collected. The adoption of ASC 842 on January 1, 2019 resulted in the recognition of right-of-use assets of approximately $17.0 million and lease liabilities for operating leases of approximately $17.0 million on its Consolidated Balance Sheets, with nothis standard did not have a material impact to retained earnings or Consolidated Statements of Operations. See Note 8 for further information regarding the impact of the adoption of ASC 842 on the Company'sour condensed consolidated financial statements.
Recent Accounting Pronouncements Not Yet Adopted 2. RECENT ACCOUNTING PRONOUNCEMENTS
In January 2017,December 2019, the FASB issued ASU No. 2017-4, Intangibles - Goodwill and Other2019-12, Income Taxes (Topic 350). The amendments in ASU 2017-4 simplify740): Simplifying the measurement of goodwill by eliminating Step 2 fromAccounting for Income Taxes (ASU 2019-12), which simplifies the goodwill impairment test. Instead, under these amendments, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment chargeaccounting for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss should not exceed the total amount of goodwill allocated to that reporting unit. The amendments areincome taxes. This guidance will be effective for public business entities forus in the first interimquarter of 2021 on a prospective basis, and annual reporting periods beginning after December 15, 2019. Earlyearly adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The Company has goodwill from a prior business combination and performs an annual impairment test or more frequently if changes or circumstances occur that would more-likely-than-not reduce the fair value of the reporting unit below its carrying value. During the year ended December 31, 2018, the Company performed its impairment assessment and determined the fair value of the aggregated reporting units exceed the carrying value, such that the Company's goodwill was not considered impaired. Based on the most recent assessment, the Company cannot anticipate future goodwill impairment assessments.permitted. The Company does not anticipate a materialexpect an impact from these amendments to the Company's financial position and results of operations. The current accounting policies and processes are not anticipated to change, except for the elimination of the Step 2 analysis.new guidance on our condensed consolidated financial statements.
In June 2018,March 2020, the FASB issued ASU No. 2018-07, Improvements2020–04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (ASU 2020-04), which provides guidance to Nonemployee Share-Based Payment Accounting. ASU 2018-07 simplifiesalleviate the burden in accounting for share-based paymentsreference rate reform by allowing certain expedients and exceptions in applying generally accepted accounting principles to nonemployeescontracts, hedging relationships, and other transactions impacted by aligning it withreference 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. This guidance is effective from March 12, 2020 through December 31, 2022 and adoption is optional. We are currently evaluating the accounting for share-based payments to employees, with certain exceptions. The Company adopted thisimpact of ASU 2020-04 on January 1, 2019 and it did not have a material effect on the Company’sour condensed consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820) - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which is designed to improve the effectiveness of disclosures by removing, modifying and adding disclosures related to fair value measurements. ASU No. 2018-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and the ASU allows for early adoption in any interim period after issuance of the update. The adoption of this ASU is not expected to have a significant impact on the Company’s consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), to require the measurement of expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable forecasts and applies to all financial assets, including trade receivables. The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. ASU No. 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and the ASU allows for early adoption as of the beginning of an interim or annual reporting period beginning after December 15, 2018. The Company is currently assessing the impact this ASU will have on its consolidated financial statements.
3. TRADE RECEIVABLES
Trade receivables, net, consisted of the following:
| | | | | | | | | | | | | | |
| | | September 30, 2020 | | December 31, 2019 |
| | | (thousands of dollars) |
| Trade receivables | | $ | 23,084 | | | $ | 26,749 | |
| Less allowance for doubtful accounts | | (428) | | | (429) | |
| Trade receivables, net | | $ | 22,656 | | | $ | 26,320 | |
|
| | | | | | | | |
| | | September 30, 2019 |
| | December 31, 2018 |
|
| | | (thousands of dollars) |
| Trade receivables | | $ | 25,930 |
| | $ | 27,564 |
|
| Less allowance for doubtful accounts | | (433 | ) | | (452 | ) |
| Trade receivables, net | | $ | 25,497 |
| | $ | 27,112 |
|
Trade receivables serve as collateral for our amended and restated credit agreement. See Note 10.11.
4. PREPAID EXPENSES AND OTHER ASSETS
Prepaid expenses and other assets consisted of the following:
|
| | | | | | | | |
| | | September 30, 2019 |
| | December 31, 2018 |
|
| | | (thousands of dollars) |
| Prepaid license | | $ | 1,411 |
| | $ | 2,419 |
|
| Spare parts | | 1,816 |
| | 1,597 |
|
| Other prepaid expenses and assets | | 499 |
| | 648 |
|
| Total prepaid expenses and other assets | | $ | 3,726 |
| | $ | 4,664 |
|
5. INVENTORIES
Inventories included the following:
| | | | | | | | | | | | | | |
| | | September 30, 2020 | | December 31, 2019 |
| | | (thousands of dollars) |
| Raw material | | $ | 2,543 | | | $ | 2,100 | |
| Work in process | | 122 | | | 142 | |
| Finished products | | 8,445 | | | 11,382 | |
| Total inventory | | $ | 11,110 | | | $ | 13,624 | |
|
| | | | | | | | |
| | | September 30, 2019 |
| | December 31, 2018 |
|
| | | (thousands of dollars) |
| Raw material | | $ | 3,278 |
| | $ | 4,742 |
|
| Work in process | | 157 |
| | 173 |
|
| Finished products | | 9,850 |
| | 11,624 |
|
| Total inventory | | $ | 13,285 |
| | $ | 16,539 |
|
Inventory serves as collateral for our amended and restated credit agreement. See Note 10.11.
Inventory included Specialty Petrochemicals products in transit valued at approximately $3.1$2.8 million and $4.1$2.9 million at September 30, 2019,2020 and December 31, 2018,2019, respectively.
5. INVESTMENT IN AMAK AND DISCONTINUED OPERATIONS
On September 30, 2020 the Company completed the final closing of the previously disclosed sale of its ownership interest in AMAK (the "Share Sale") to AMAK and certain existing shareholders of AMAK and their assignees (collectively, the "Purchasers"). The Share Sale was completed in multiple closings pursuant to a Share Sale and Purchase Agreement, dated September 22, 2019 (as amended, the "Purchase Agreement"), among the Company, AMAK, and other Purchasers and resulted in aggregate gross proceeds to the Company of Saudi Riyals ("SAR") 265 million (approximately $70 million) (before taxes and expenses). The Company used a portion of the approximately $60 million in net proceeds from the Share Sale to prepay outstanding borrowings of $30 million under the term loan facility (the "Term Loan Facility") of the Company's amended and restated credit agreement (as amended, the "ARC Agreement"). As of December 31, 2019, the
Company had a non-controlling equity interest of 33.3% in AMAK of approximately $32.9 million. This investment was accounted for under the equity method.
As a condition to the effectiveness of the Purchase Agreement, the Purchasers advanced 5% of the purchase price (or approximately $3.5 million) in the form of a non-refundable deposit. Pursuant to the Purchase Agreement, (i) with respect to any Purchaser that 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 and (ii) with respect to any 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, an amount equal to 50% of the non-refundable deposit paid by such Purchasers was forfeited to the Company as liquidated damages and such amount was not applied to the purchase price paid by the applicable Purchaser.
On March 26, 2020, the Company and one Purchaser 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 aggregate gross proceeds (before taxes and transaction expenses) of SAR 40 million (or approximately $10.7 million) (inclusive of the full amount of the Purchaser’s non-refundable deposit previously paid of $0.5 million). The Company recorded a foreign tax payable of approximately $0.3 million related to the First Closing.
During the three months ended September 30, 2020, the Company completed additional closings of the Share Sale with respect to its remaining ownership interest in AMAK. In connection with these closings, the Company sold a total of 22,467,422 ordinary shares for aggregate gross proceeds (before taxes and transaction expenses) of SAR 224 million (or approximately $59.9 million) (inclusive of $1.5 million which constitutes 50% of the non-refundable deposits previously paid by certain Purchasers). As none of these third quarter 2020 closings were completed prior to March 31, 2020, the remaining portion of the initial deposits (approximately $1.5 million) were forfeited to the Company as liquidated damages and were not applied to the purchase price. These amounts are included in income from discontinued operations, net of tax. The Company recorded a foreign tax payable of approximately $1.8 million related to the third quarter 2020 closings.
In connection with the completion of the Share Sale, the Company and AMAK entered into an agreement whereby AMAK agreed to withhold approximately $2.1 million of the purchase price to pay the Company's tax obligations in Saudi Arabia. The Company is in the process of finalizing and filing the necessary tax returns in the Kingdom of Saudi Arabia. Upon payment, the Company will have a foreign tax credit which can be used to offset U.S. taxes. As of September 30, 2020, approximately $0.2 million of foreign taxes have been paid. The remaining funds withheld by AMAK are included in prepaid expenses and other assets on the Company's condensed consolidated balance sheet as of September 30, 2020.
As previously disclosed, and as a result of the Company’s investment in AMAK, the Company was required to execute a limited guarantee on October 24, 2010 (the “Guarantee”) of up to 41% of a loan (the “Loan”) by the Saudi Industrial Development Fund ("SIDF") to AMAK to fund the continued construction of the AMAK facilities and to provide working capital needs. The provision of personal or corporate guarantees, as applicable, by each shareholder of AMAK was a condition to SIDF providing the Loan. Pursuant to the Purchase Agreement, the Purchasers (other than AMAK) agreed, upon the completion of the Share Sale, to assume the Company’s obligation under the Guarantee (proportionately based upon such Purchaser’s percentage acquisition of ordinary shares in the Share Sale). While a formal written release of the Company from the Guarantee was not obtained from SIDF prior to closing, the Company believes that the Purchasers’ assumption of the Company’s obligation under the Guarantee effectively eliminates the Company’s liability arising under the Guarantee.
Included in discontinued operations are the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended
September 30, |
| | | 2020 | | 2019 | | 2020 | | 2019 |
| | | (thousands of dollars) | | (thousands of dollars) |
| Saudi administration and transaction expenses | | $ | (2,605) | | | $ | 0 | | | $ | (2,490) | | | $ | 0 | |
| Equity in earnings (losses) of AMAK | | 682 | | | (942) | | | 455 | | | (1,093) | |
| Gain (loss) on sale of equity interest | | 28,510 | | | (325) | | | 35,173 | | | (325) | |
| Income (loss) from discontinued operations before taxes | | 26,587 | | | (1,267) | | | 33,138 | | | (1,418) | |
| Tax (expense) benefit | | (5,263) | | | 265 | | | (6,959) | | | 298 | |
| Income (loss) from discontinued operations, net of tax | | $ | 21,324 | | | $ | (1,002) | | | $ | 26,179 | | | $ | (1,120) | |
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 operations and financial position for AMAK are as follows:
Results of Operations
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | | 2020 | | 2019 | | 2020 | | 2019 |
| | | (thousands of dollars) | | (thousands of dollars) |
| Sales | | $ | 23,943 | | | $ | 19,643 | | | $ | 62,632 | | | $ | 60,873 | |
| Cost of sales | | 18,644 | | | 19,072 | | | 53,294 | | | 55,804 | |
| Gross profit | | 5,299 | | | 571 | | | 9,338 | | | 5,069 | |
| Selling, general, and administrative | | 3,808 | | | 3,557 | | | 8,850 | | | 9,102 | |
| Operating income (loss) | | 1,491 | | | (2,986) | | | 488 | | | (4,033) | |
| Other income | | 16 | | | 43 | | | 33 | | | 396 | |
| Finance and interest expense | | (237) | | | (456) | | | (871) | | | (1,349) | |
| Income (loss) before Zakat and income taxes | | 1,270 | | | (3,399) | | | (350) | | | (4,986) | |
| Zakat and income tax (benefit) | | (240) | | | 444 | | | 859 | | | 1,332 | |
| Net Income (Loss) | | $ | 1,510 | | | $ | (3,843) | | | $ | (1,209) | | | $ | (6,318) | |
Financial Position
| | | | | | | | | | | | | | |
| | | September 30, | | December 31, |
| | | 2020 | | 2019 |
| | | (thousands of dollars) |
| Current assets | | $ | 37,945 | | | $ | 45,354 | |
| Noncurrent assets | | 204,865 | | | 196,564 | |
| Total assets | | $ | 242,810 | | | $ | 241,918 | |
| | | | |
| Current liabilities | | $ | 23,622 | | | $ | 27,645 | |
| Long term liabilities | | 100,698 | | | 79,348 | |
| Stockholders' equity | | 118,490 | | | 134,925 | |
| | | $ | 242,810 | | | $ | 241,918 | |
The equity in the earnings (losses) of AMAK included in income (loss) from discontinued operations, net of tax, on the consolidated statements of operations for the three and nine months ended September 30, 2020 and 2019, is comprised of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | | 2020 | | 2019 | | 2020 | | 2019 |
| | | (thousands of dollars) | | (thousands of dollars) |
| AMAK Net Income (Loss) | | 1,510 | | | (3,843) | | | (1,209) | | | (6,318) | |
| | | | | | | | |
| | | | | | | | |
| Company's share of income (loss) reported by AMAK | | 345 | | * | (1,279) | | | (555) | | * | (2,103) | |
| Amortization of difference between Company's investment in AMAK and Company's share of net assets of AMAK | | 337 | | | 337 | | | 1,010 | | | 1,010 | |
| Equity in earnings (losses) of AMAK | | 682 | | | (942) | | | 455 | | | (1,093) | |
| * Percentage of Ownership varies during the period. |
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:
| | | | | | | | | | | | | | |
| | | September 30, 2020 | | December 31, 2019 |
| | | (thousands of dollars) |
| Prepaid license | | $ | 605 | | | $ | 1,209 | |
| Prepaid insurance premiums | | 1,767 | | | 0 | |
| Spare parts | | 2,330 | | | 1,857 | |
| Insurance receivable | | 0 | | | 1,148 | |
| Cash held in escrow by AMAK | | 1,877 | | | 0 | |
| Other prepaid expenses and assets | | 437 | | | 733 | |
| Total prepaid expenses and other assets | | $ | 7,016 | | | $ | 4,947 | |
7. PLANT, PIPELINE AND EQUIPMENT
Plant, pipeline and equipment consisted of the following:
| | | | | | | | | | | | | | |
| | September 30, 2020 | | December 31, 2019 |
| | | (thousands of dollars) |
| Platinum catalyst metal | | $ | 1,580 | | | $ | 1,580 | |
| Catalyst | | 4,328 | | | 4,095 | |
| Land | | 5,428 | | | 5,428 | |
| Plant, pipeline and equipment | | 266,128 | | | 258,651 | |
| Construction in progress | | 7,516 | | | 5,052 | |
| Total plant, pipeline and equipment | | $ | 284,980 | | | $ | 274,806 | |
| Less accumulated depreciation | | (97,082) | | | (85,887) | |
| Net plant, pipeline and equipment | | $ | 187,898 | | | $ | 188,919 | |
|
| | | | | | | | |
| | | September 30, 2019 |
| | December 31, 2018 |
|
| | | (thousands of dollars) |
| Platinum catalyst metal | | $ | 1,580 |
| | $ | 1,612 |
|
| Catalyst | | 4,387 |
| | 3,131 |
|
| Land | | 5,428 |
| | 5,428 |
|
| Plant, pipeline and equipment | | 259,435 |
| | 253,905 |
|
| Construction in progress | | 4,442 |
| | 4,343 |
|
| Total plant, pipeline and equipment | | $ | 275,272 |
| | $ | 268,419 |
|
| Less accumulated depreciation | | (84,927 | ) | | (73,762 | ) |
| Net plant, pipeline and equipment | | $ | 190,345 |
| | $ | 194,657 |
|
Plant, pipeline, and equipment serve as collateral for our amended and restated credit agreement. See Note 10.11.
Labor capitalized for construction was approximately nil and $0.1 million for the three months and $0.1 million and $2.2 million for the nine months ended September 30, 2019 and 2018, respectively.
Construction in progress during the first nine months of 20192020 included Advanced Reformer unit improvements and pipeline maintenance at SHR and equipment modifications at TC. Construction in progress during the first nine months of 20182019 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$0.2 million for the three months ended September 30, 2020 and 2019, respectively, and $0.7 million and nil$0.7 million for the nine months ended September 30, 20192020 and 2018,2019, respectively.
7. GOODWILL AND INTANGIBLE ASSETS, NET
Goodwill and intangible assets were recorded in relation to the acquisition of TC on October 1, 2014.
Goodwill was $21.8 million and $21.8 million as of September 30, 2019 and December 31, 2018, respectively.
The following tables summarize the gross carrying amounts and accumulated amortization of intangible assets by major class:
|
| | | | | | | | | | | | |
| | | September 30, 2019 |
| | | Gross | | Accumulated Amortization | | Net |
| Intangible assets subject to amortization (Definite-lived) | | (thousands of dollars) |
| Customer relationships | | $ | 16,852 |
| | $ | (5,617 | ) | | $ | 11,235 |
|
| Non-compete agreements | | 94 |
| | (94 | ) | | — |
|
| Licenses and permits | | 1,471 |
| | (575 | ) | | 896 |
|
| Developed technology | | 6,131 |
| | (3,066 | ) | | 3,065 |
|
| | | 24,548 |
| | (9,352 | ) | | 15,196 |
|
| Intangible assets not subject to amortization (Indefinite-lived) | | | | | | |
| Emissions allowance | | 197 |
| | — |
| | 197 |
|
| Trade name | | 2,158 |
| | — |
| | 2,158 |
|
| Total | | $ | 26,903 |
| | $ | (9,352 | ) | | $ | 17,551 |
|
|
| | | | | | | | | | | | |
| | | December 31, 2018 |
| | | Gross | | Accumulated Amortization | | Net |
| Intangible assets subject to amortization (Definite-lived) | | (thousands of dollars) |
| Customer relationships | | $ | 16,852 |
| | $ | (4,775 | ) | | $ | 12,077 |
|
| Non-compete agreements | | 94 |
| | (80 | ) | | 14 |
|
| Licenses and permits | | 1,471 |
| | (495 | ) | | 976 |
|
| Developed technology | | 6,131 |
| | (2,606 | ) | | 3,525 |
|
| | | 24,548 |
| | (7,956 | ) | | 16,592 |
|
| Intangible assets not subject to amortization (Indefinite-lived) | | | | | | |
| Emissions allowance | | 197 |
| | — |
| | 197 |
|
| Trade name | | 2,158 |
| | — |
| | 2,158 |
|
| Total | | $ | 26,903 |
| | $ | (7,956 | ) | | $ | 18,947 |
|
Amortization expense for intangible assets included in cost of sales for the three months ended September 30, 2019 and 2018, was approximately $0.5 million and $0.5 million, respectively, and for the nine months ended September 30, 2019 and 2018, was approximately $1.4 million and $1.4 million, respectively.
Based on identified intangible assets that are subject to amortization as of September 30, 2019, we expect future amortization expenses for each period to be as follows: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Total |
| | Remainder of 2019 |
| | 2020 |
| | 2021 |
| | 2022 |
| | 2023 |
| | 2024 |
| | Thereafter |
|
| | | (thousands of dollars) |
| Customer relationships | | $ | 11,235 |
| | $ | 281 |
| | $ | 1,123 |
| | $ | 1,123 |
| | 1,123 |
| | 1,123 |
| | 1,123 |
| | $ | 5,339 |
|
| Licenses and permits | | 896 |
| | 26 |
| | 106 |
| | 101 |
| | 86 |
| | 86 |
| | 86 |
| | 405 |
|
| Developed technology | | 3,065 |
| | 153 |
| | 613 |
| | 613 |
| | 613 |
| | 613 |
| | 460 |
| | — |
|
| Total future amortization expense | | $ | 15,196 |
| | $ | 460 |
| | $ | 1,842 |
| | $ | 1,837 |
| | $ | 1,822 |
| | $ | 1,822 |
| | $ | 1,669 |
| | $ | 5,744 |
|
8. LEASES
The Company leases certain rail cars, rail equipment, office space and office equipment. The Company determines if a contract is a lease at the inception of the arrangement. The Company reviews all options to extend, terminate, or purchase its right-of-use assets at the inception of the lease and accounts for these options when they are reasonably certain of being exercised.
Leases with an initial term of 12 months or less are not recorded on the consolidated balance sheets.Condensed Consolidated Balance Sheets. Lease expense for these leases is recognized on a straight-line basis over the lease term.
The Company has no finance leases.
The components of lease expense were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| ($ in thousands) | Classification in the Condensed Consolidated Statements of Income | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| Operating lease cost (a) | Cost of sales, exclusive of depreciation and amortization | $ | 1,115 | | | $ | 1,114 | | | $ | 3,036 | | | $ | 3,369 | |
| Operating lease cost (a) | Selling, general and administrative | 34 | | | 34 | | | 102 | | | 103 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Total lease cost | | $ | 1,149 | | | $ | 1,148 | | | $ | 3,138 | | | $ | 3,472 | |
|
| | | | | | | | |
| ($ in thousands) | Classification in the Condensed Consolidated Statements of Income | Three Months Ended
September 30, 2019 | | Nine Months Ended
September 30, 2019 |
| Operating lease cost (a) | Cost of sales, exclusive of depreciation and amortization | $ | 1,114 |
| | $ | 3,369 |
|
| Operating lease cost (a) | Selling, general and administrative | 34 |
| | 103 |
|
| Total operating lease cost | | $ | 1,148 |
| | $ | 3,472 |
|
| | | | | |
| Finance lease cost: | | | | |
| Amortization of right-of-use assets | Depreciation | $ | — |
| | — |
|
| Interest on lease liabilities | Interest Expense | — |
| | — |
|
| Total finance lease cost | | $ | — |
| | $ | — |
|
| | | | | |
| Total lease cost | | $ | 1,148 |
| | $ | 3,472 |
|
| | | | | |
| (a) Short-term lease costs were approximately $64 thousand during the period. | | |
The Company had no0 variable lease expense, as defined by ASC 842, during the period. |
| | | | |
| ($ in thousands) | Classification on the Condensed Consolidated Balance Sheets | September 30, 2019 |
| Assets: | | |
| Operating | Operating lease assets | $ | 14,364 |
|
| Finance | Property, plant, and equipment | — |
|
| Total leased assets | | $ | 14,364 |
|
| | | |
| Liabilities: | | |
| Current | | |
| Operating | Current portion of operating lease liabilities | $ | 3,247 |
|
| Finance | Short-term debt and current portion of long-term debt | — |
|
| Noncurrent | | |
| Operating | Operating lease liabilities | 11,117 |
|
| Finance | Long-term debt | — |
|
| Total lease liabilities | | $ | 14,364 |
|
|
| | | | | | | |
| ($ in thousands) | Three Months Ended
September 30, 2019 | | Nine Months Ended
September 30, 2019 |
| Cash paid for amounts included in the measurement of lease liabilities: | | | |
| Operating cash flows used for operating leases | $ | 1,127 |
| | $ | 2,260 |
|
| Operating cash flows used for finance leases | — |
| | — |
|
| Financing cash flows used for finance leases | — |
| | — |
|
| Right-of-use assets obtained in exchange for lease obligations: | | | |
| Operating leases | $ | 25 |
| | $ | 138 |
|
| Finance leases | — |
| | — |
|
| | | | | | | | | | | | | | |
| ($ in thousands) | Classification on the Condensed Consolidated Balance Sheets | September 30, 2020 | | December 31, 2019 |
| Assets: | | | | |
| Operating | Operating lease assets | $ | 11,154 | | | $ | 13,512 | |
| | | | |
| Total leased assets | | $ | 11,154 | | | $ | 13,512 | |
| | | | |
| Liabilities: | | | | |
| Current: | | | | |
| Operating | Current portion of operating lease liabilities | $ | 3,148 | | | $ | 3,174 | |
| | | | |
| Noncurrent: | | | | |
| Operating | Operating lease liabilities | 8,006 | | | 10,338 | |
| | | | |
| Total lease liabilities | | $ | 11,154 | | | $ | 13,512 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| ($ in thousands) | 2020 | | 2019 | | 2020 | | 2019 |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | |
| Operating cash flows used for operating leases | $ | 925 | | | $ | 1,127 | | | $ | 2,806 | | | $ | 2,260 | |
| | | | | | | |
| | | | | | | |
| Right-of-use assets obtained in exchange for lease obligations: | | | | | | | |
| Operating leases | $ | 37 | | | $ | 25 | | | $ | 37 | | | $ | 138 | |
| | | | | | | |
|
| | | | |
| September 30, 20192020 |
| Weighted-average remaining lease term (in years): | |
| Operating leases | 4.8 |
3.9 |
Finance leases | 0.0 |
|
| Weighted-average discount rate: | |
| Operating leases | 4.5 | % |
Finance leases | — | % |
Nearly allMost 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 September 30, 2019,2020, maturities of lease liabilities were as follows:
| | | | | | | |
| ($ in thousands) | Operating Leases | | |
| 2020 | $ | 902 | | | |
| 2021 | 3,553 | | | |
| 2022 | 3,231 | | | |
| 2023 | 2,339 | | | |
| 2024 | 1,026 | | | |
| Thereafter | 1,082 | | | |
| Total lease payments | $ | 12,133 | | | |
| Less: Interest | 979 | | | |
| Total lease obligations | $ | 11,154 | | | |
9. INTANGIBLE ASSETS, NET
|
| | | | | | |
| ($ in thousands) | Operating Leases | Finance Leases |
| 2020 | $ | 3,811 |
| $ | — |
|
| 2021 | 3,559 |
| — |
|
| 2022 | 3,391 |
| — |
|
| 2023 | 2,571 |
| — |
|
| 2024 | 1,243 |
| — |
|
| Thereafter | 1,329 |
| — |
|
| Total lease payments | $ | 15,904 |
| $ | — |
|
| Less: Interest | 1,540 |
| — |
|
| Total lease obligations | $ | 14,364 |
| $ | — |
|
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:
| | | | | | | | | | | | | | | | | | | | |
| | | September 30, 2020 |
| | Gross | | Accumulated Amortization | | Net |
| | (thousands of dollars) |
| Customer relationships | | $ | 16,852 | | | $ | (6,741) | | | $ | 10,111 | |
| Non-compete agreements | | 94 | | | (94) | | | 0 | |
| Licenses and permits | | 1,471 | | | (680) | | | 791 | |
| Developed technology | | 6,131 | | | (3,679) | | | 2,452 | |
| Total | | $ | 24,548 | | | $ | (11,194) | | | $ | 13,354 | |
| | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2019 |
| | Gross | | Accumulated Amortization | | Net |
| | (thousands of dollars) |
| Customer relationships | | $ | 16,852 | | | $ | (5,898) | | | $ | 10,954 | |
| Non-compete agreements | | 94 | | | (94) | | | 0 | |
| 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 was approximately $0.5 million and $0.5 million for the three months September 30, 2020 and 2019, respectively, and approximately $1.4 million and $1.4 million for the nine months ended September 30, 2020 and 2019, respectively.
Based on identified intangible assets that are subject to amortization as of September 30, 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 | | $ | 10,111 | | | $ | 281 | | | $ | 1,123 | | | $ | 1,123 | | | 1,123 | | | 1,123 | | | 1,123 | | | $ | 4,215 | |
| | | | | | | | | | | | | | | | |
| Licenses and permits | | 791 | | | 26 | | | 101 | | | 86 | | | 86 | | | 86 | | | 86 | | | 320 | |
| Developed technology | | 2,452 | | | 153 | | | 613 | | | 613 | | | 613 | | | 460 | | | 0 | | | 0 | |
| Total future amortization expense | | $ | 13,354 | | | $ | 460 | | | $ | 1,837 | | | $ | 1,822 | | | $ | 1,822 | | | $ | 1,669 | | | $ | 1,209 | | | $ | 4,535 | |
Disclosures related to periods prior to adoption of ASU 2016-02
The Company adopted ASU 2016-02 using a modified retrospective transition approach on January 1, 2019 as noted in Note 1. As required, the following disclosure is provided for periods prior to adoption. Minimum lease commitments as of December 31, 2018 that have initial or remaining lease terms in excess of one year are as follows:
|
| | | |
| ($ in thousands) | Operating Leases |
| 2019 | $ | 3,670 |
|
| 2020 | 3,583 |
|
| 2021 | 3,418 |
|
| 2022 | 3,107 |
|
| 2023 | 2,288 |
|
| Beyond 2023 | 2,065 |
|
9.10. ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
| | | | | | | | | | | | | | |
| | | September 30, 2020 | | December 31, 2019 |
| | | (thousands of dollars) |
| | | | |
| Property taxes | | 2,526 | | | 0 | |
| Payroll | | 2,923 | | | 1,250 | |
| Royalties | | 133 | | | 273 | |
| Officer compensation | | 891 | | | 1,687 | |
| | | | |
| Foreign taxes | | 2,237 | | | 0 | |
| AMAK transaction costs | | 3,648 | | | 1,000 | |
| Other | | 834 | | | 1,530 | |
| Total | | $ | 13,192 | | | $ | 5,740 | |
|
| | | | | | | | |
| | | September 30, 2019 |
| | December 31, 2018 |
|
| | | (thousands of dollars) |
| Accrued state taxes | | 249 |
| | 210 |
|
| Accrued property taxes | | 2,572 |
| | — |
|
| Accrued payroll | | 812 |
| | 936 |
|
| Accrued interest | | 32 |
| | 31 |
|
| Accrued officer compensation | | 1,251 |
| | — |
|
| Accrued restructuring & severance | | 37 |
| | 1,221 |
|
| Accrued foreign taxes | | — |
| | 802 |
|
| Other | | 2,317 |
| | 2,239 |
|
| Total | | $ | 7,270 |
| | $ | 5,439 |
|
10.11. LIABILITIES AND LONG-TERM DEBT
Senior Secured Credit Facilities
As of September 30, 2019, we2020, the Company had $8.00 outstanding borrowings under the Revolving Facility and approximately $47.1 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 $82.0 million in borrowings outstanding under the term loan facility of the ARC Agreement (the "TermTerm Loan Facility" and,Facility (and, together with the Revolving Facility, the "Credit Facilities"). In addition, wethe Company had approximately $46$56 million of availability under our Revolving Facility at September 30, 2019.2020. TOCCO’s ability to make additional borrowings under the Revolving Facility at September 30, 20192020 was limited by, and in the future may be limited by, ourthe Company's obligation to maintain compliance with the covenants contained in the ARC Agreement (including maintenance of a maximum Consolidated Leverage Ratio and minimum Consolidated Fixed Charge Coverage Ratio (each as defined in the ARC Agreement)).
On March 29, 2019,May 8, 2020, TOCCO, as borrower, and SHR, GSPL and TC as guarantors, entered into a SixthSeventh Amendment (“Sixth Amendment”) to the ARC Agreement. Pursuant to the SixthSeventh Amendment, certain amendments were made to the terms of the ARC Agreement, including, increasingamong other things, to (a) permit the maximumincurrence of additional indebtedness in the form of loans (the "PPP Loans") under the United States Small Business Administration Paycheck Protection Program (the "PPP") and (b) exclude the PPP Loans from the calculation of the Consolidated Leverage Ratio until such time that must be maintained by TOCCO to 4.75 to 1.00 forany portion of the fourPPP Loans are not forgiven in accordance with the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act").
For each fiscal quarters ended March 31, 2019, 4.50 to 1.00 for the four fiscal quarters ended June 30, 2019 and 4.00 to 1.00 for the four fiscal quarters ended September 30, 2019. For the four fiscal quarters endedquarter after December 31, 2019, and each fiscal quarter thereafter, TOCCO must maintain a maximum Consolidated Leverage Ratio of 3.50 to 1.00 (subject to temporary increase following certain acquisitions). TOCCO's Consolidated Leverage Ratio was 1.62 and 2.62 as of September 30, 2020 and June 30, 2020, 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 1.68 and 1.98 as of September 30, 2020 and December 31, 2019, respectively. As noted above, the Consolidated Leverage Ratio specifically excludes the PPP Loans until such time that any portion of the PPP Loans are not forgiven in accordance with the CARES Act. The Company used a portion of the approximately $60 million in net proceeds from the Share Sale, discussed in Note 5, to prepay outstanding borrowings of $30 million under the Term Loan Facility of the Company's ARC Agreement.
The maturity date for the ARC Agreement is July 31, 2023. As of September 30, 2019,2020, the year to date effective interest rate for the Credit Facilities was 4.59%2.84%. The ARC Agreement contains a number of customary affirmative and negative covenants and we werethe Company was in compliance with those covenants as of September 30, 2019.2020.
For a summary of additional terms of the Credit Facilities, see Note 12, “Long-Term Debt and Long-Term Obligations”NOTE 13, “LONG-TERM DEBT AND LONG-TERM OBLIGATIONS" to the consolidated financial statements set forth in ourthe Company's Annual Report on Form 10-K for the year ended December 31, 2018.2019.
PPP Loans
On May 6, 2020, SHR and TC (collectively, the “Borrowers") received loan proceeds from the PPP Loans in an aggregate principal amount of approximately $6.1 million under the PPP. The PPP Loans are evidenced by unsecured promissory notes each payable to Bank of America, N.A. The Borrowers fully utilized the PPP Loans to cover payroll and benefits costs in accordance with the relevant terms and conditions of the CARES Act. The PPP Loans mature on May 6, 2022, and bear interest at a stated rate of 1.0% per annum. The Company is pursuing and expects to receive full forgiveness of the PPP Loans in accordance with the provisions of the CARES Act.
Debt Issuance Costs
Debt issuance costs of approximately $0.9 million were incurred in connection with the fourth amendment to the ARC Agreement. Unamortized debt issuance costs of approximately $0.7$0.5 million and $0.8$0.6 million for the periods ended September 30, 20192020 and December 31, 2018,2019, have been netted against outstanding loan balances.
Long-term debt and long-term obligations are summarized as follows:
| | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 |
| (thousands of dollars) |
| Revolving Facility | 0 | | | 3,000 | |
| Term Loan Facility | 47,656 | | | 80,938 | |
| | | |
| Loan fees | (513) | | | (649) | |
| Total long-term debt | 47,143 | | | 83,289 | |
| | | |
| Less current portion including loan fees | 4,194 | | | 4,194 | |
| | | |
| Total long-term debt, less current portion including loan fees | 42,949 | | | 79,095 | |
12. COMMITMENTS AND CONTINGENCIES
|
| | | | | |
| | September 30, 2019 | | December 31, 2018 |
| | (thousands of dollars) |
| Revolving Facility | 8,000 |
| | 18,000 |
|
| Term Loan Facility | 82,031 |
| | 85,312 |
|
| Loan fees | (694 | ) | | (830 | ) |
| Total long-term debt | 89,337 |
| | 102,482 |
|
| | | | |
| Less current portion including loan fees | 4,194 |
| | 4,194 |
|
| | | | |
| Total long-term debt, less current portion including loan fees | 85,143 |
| | 98,288 |
|
COVID-19
Subsequent
In December 2019, a novel strain of coronavirus, which causes the infectious disease known as COVID-19, was reported in Wuhan, China. The World Health Organization declared COVID-19 a “Public Health Emergency of International Concern” on January 30, 2020 and a global pandemic on March 11, 2020. In March and April, many U.S. states and local jurisdictions began issuing ‘stay-at-home’ orders, which continue in various forms as of the date of this report. Notwithstanding such ‘stay-at-home’ orders, to September 30, 2019,date, our operations have been deemed an essential business under applicable governmental orders based on the critical nature of the products we made an optional principal paymentoffer.
As a result of $5.0 million against the Revolving Facility, reducingimpact of the outstanding amount from $8.0 millionCOVID-19 outbreak, some of our customers have experienced a significant decrease in demand. A prolonged economic slowdown, period of social quarantine (imposed by the government or otherwise), or a prolonged period of decreased travel due to $3.0 million.COVID-19 or the responses thereto, may have a material negative adverse impact on our ability to sell products, and consequently our revenues and results of operations.
11. STOCK-BASED COMPENSATION
The Stock Option Plan for Key Employees, as well as, the Non-Employee Director Stock Option Plan (hereinafter collectively referred to as the “Stock Option Plans”), were approved by the Company’s stockholders in July 2008. The Stock Option Plans allot for the issuance of up to 1,000,000 shares.
The Trecora Resources Stock and Incentive Plan (the “Plan”) was approved by the Company’s stockholders in June 2012. As amended, the Plan allots for the issuance of up to 2.5 million shares in the form of stock options or restricted stock unit awards.
Stock-based compensation expense of approximately $0.3 million and $0.6 million was recognized during the three months and $0.9 million and $1.0 million for the nine months ended September 30, 2019 and 2018, respectively.
Stock Options and Warrant Awards
Stock options and warrants granted under the provisionsfull extent of the Stock Option Plans permitimpact of COVID-19 on our business and operations currently cannot be estimated and will depend on a number of factors including the purchasescope and duration of our common stock at exercise prices equal to the closing price of Company common stock on the date the options were granted. The options have terms of 10 years and generally vest ratably over terms of 4 to 5 years. There were no stock options or warrant awards issued during the three or nine months ended September 30, 2019 or 2018.global pandemic.
A summary of the status of the Company’s stock option and warrant awards is as follows:
|
| | | | | | | | | | | |
| | Stock Options and Warrants |
| | Weighted Average Exercise Price Per Share |
| | Weighted Average Remaining Contractual Life | | Intrinsic Value (in thousands) |
|
| Outstanding at January 1, 2019 | 745,830 |
| | 10.33 | | | | |
| Granted | — |
| | — |
| | | | |
| Exercised | (85,000 | ) | | 7.71 | | | | |
| Forfeited | (173,830 | ) | | 10.10 |
| | | | |
| Outstanding at September 30, 2019 | 487,000 |
| | 10.87 | | 3.8 | | $ | — |
|
| Expected to vest | — |
| | | | | | $ | — |
|
| Exercisable at September 30, 2019 | 487,000 |
| | 10.87 | | 3.8 | | $ | — |
|
The aggregate intrinsic value of options was calculated as the difference between the exercise price of the underlying awards and the quoted price of our common stock. At September 30, 2019, options to purchase approximately 0.1 million shares of common stock were in-the-money.
Since no options were granted, the weighted average grant-date fair value per share of options granted during the three months ended September 30, 2019 and 2018, respectively, was $0. During the nine months ended September 30, 2019 and 2018, the aggregate intrinsic value of options and warrants exercised was approximately $0.1 million and $0.6 million, respectively, determined as of the date of option exercise.
The Company received no cash from the exercise of options during the nine months ended September 30, 2019 and 2018. Of the 85,000 stock options exercised, the Company only issued approximately 11,000 shares due to cashless transactions. The tax benefit realized from the exercise was insignificant.
The Company has no non-vested options as of September 30, 2019.
Restricted Stock Unit Awards
Generally, restricted stock unit awards are granted annually to officers and directors of the Company under the provisions of the Plan. Restricted stock units are also granted ad hoc to attract or retain key personnel, and the terms and conditions under which these restricted stock units vest vary by award. The fair market value of restricted stock units granted is equal to the Company’s closing stock price on the date of grant. Restricted stock units granted generally vest ratably over periods ranging from 2.5 to 5 years. Certain awards also include vesting provisions based on performance metrics. Upon vesting, the restricted stock units are settled by issuing one share of Company common stock per unit.
A summary of the status of the Company's restricted stock units activity is as follows: |
| | | | |
| | Shares of Restricted Stock Units |
| | Weighted Average Grant Date Price per Share |
| Outstanding at January 1, 2019 | 405,675 |
| | 11.27 |
| Granted | 190,615 |
| | 9.22 |
| Forfeited | (123,434 | ) | | 10.82 |
| Vested | (136,568 | ) | | 11.86 |
| Outstanding at September 30, 2019 | 336,288 |
| | 9.83 |
| Expected to vest | 336,288 |
| | |
12. INCOME TAXES
We file an income tax return in the U.S. federal jurisdiction and a margin tax return in Texas. We received notification from the Internal Revenue Service ("IRS") in November 2016 that the December 31, 2014, tax return was selected for audit. In April 2017, the audit was expanded to include the year ended December 31, 2015, to review the refund claim related to
researchCurrently we believe that we have sufficient cash on hand and development activities. We received notification from the IRS in March 2018 that the audit was complete. We also received notification that Texas will auditgenerate sufficient cash through operations to support our R&D credit calculations for 2014 and 2015. We were notified by Texas that the audit has been temporarily suspended as the Comptroller's office reviews its audit process regarding R&D credits. We do not expect any changes related to the Texas audit. Tax returns for various jurisdictions remain open for examinationoperations for the years 2014 through 2018. Asforeseeable future; however, we will continue to evaluate our business operations based on new information as it becomes available and will make changes that we consider necessary in light of September 30, 2019 and December 31, 2018, respectively, we recognized no adjustment for uncertain tax positions or related interest and penalties.any new developments regarding the pandemic.
The effective tax rate varies frompandemic is developing rapidly and the federal statutory ratefull extent to which COVID-19 will ultimately impact us depends on future developments, including the duration and spread of 21%, primarily as a result of state tax expense, stock based compensation and a research and development credit for the three and nine months ended September 30, 2019 and 2018. We continue to maintain a valuation allowance against certain deferred tax assets, specifically for mining claims for PEVM, where realization is not certain.
13. NET INCOME PER COMMON SHARE
The following tables set forth the computation of basic and diluted net income (loss) per share for the three and nine months ended September 30, 2019 and 2018, respectively.
Net Income per Common Share - Continuing Operations
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended
September 30, 2019 | | Three Months Ended
September 30, 2018 |
| | | Income (Loss) |
| | Shares |
| | Per Share Amount |
| | Income (Loss) |
| | Shares |
| | Per Share Amount |
|
| | | (in thousands, except per share amounts) |
| Basic: | | | | | | | | | | | | |
| Net income (loss) from continuing operations | | $ | 1,583 |
| | 24,717 |
| | $ | 0.06 |
| | $ | (716 | ) | | 24,483 |
| | $ | (0.03 | ) |
| Unvested restricted stock units | | | | 336 |
| | | | | | 398 |
| | |
| Dilutive stock options outstanding | | | | — |
| | | | | | 294 |
| | |
| Diluted: | | | | | | | | | | | | |
| Net income (loss) from continuing operations | | $ | 1,583 |
| | 25,053 |
| | $ | 0.06 |
| | $ | (716 | ) | | 25,175 |
| | $ | (0.03 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | Nine Months Ended
September 30, 2019 | | Nine Months Ended
September 30, 2018 |
| | | Income |
| | Shares |
| | Per Share Amount |
| | Income |
| | Shares |
| | Per Share Amount |
|
| | | (in thousands, except per share amounts) |
| Basic: | | | | | | | | | | | | |
| Net income (loss) from continuing operations | | $ | 5,856 |
| | 24,689 |
| | $ | 0.24 |
| | $ | 3,489 |
| | 24,397 |
| | $ | 0.14 |
|
| Unvested restricted stock units | | | | 388 |
| | | | | | 383 |
| | |
| Dilutive stock options outstanding | | | | — |
| | | | | | 358 |
| | |
| Diluted: | | | | | | | | | | | | |
| Net income (loss) from continuing operations | | $ | 5,856 |
| | 25,077 |
| | $ | 0.23 |
| | $ | 3,489 |
| | 25,138 |
| | $ | 0.14 |
|
Net Income Common Share - Discontinued Operations
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended
September 30, 2019 | | Three Months Ended
September 30, 2018 |
| | | Income (Loss) |
| | 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 | | $ | (1,002 | ) | | 24,717 |
| | $ | (0.04 | ) | | $ | (893 | ) | | 24,483 |
| | $ | (0.04 | ) |
| Unvested restricted stock units | | | | 336 |
| | | | | | 398 |
| | |
| Dilutive stock options outstanding | | | | — |
| | | | | | 294 |
| | |
| Diluted: | | | | | | | | | | | | |
| Net income (loss) from discontinued operations, net of tax | | $ | (1,002 | ) | | 25,053 |
| | $ | (0.04 | ) | | $ | (893 | ) | | 25,175 |
| | $ | (0.04 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | Nine Months Ended
September 30, 2019 | | Nine Months Ended
September 30, 2018 |
| | | Income (Loss) |
| | 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 | | $ | (1,120 | ) | | 24,689 |
| | $ | (0.05 | ) | | $ | (531 | ) | | 24,397 |
| | $ | (0.02 | ) |
| Unvested restricted stock units | | | | 388 |
| | | | | | 383 |
| | |
| Dilutive stock options outstanding | | | | — |
| | | | | | 358 |
| | |
| Diluted: | | | | | | | | | | | | |
| Net income (loss) from discontinued operations, net of tax | | $ | (1,120 | ) | | 25,077 |
| | $ | (0.04 | ) | | $ | (531 | ) | | 25,138 |
| | $ | (0.02 | ) |
Net Income per Common Share
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended
September 30, 2019 | | Three Months Ended
September 30, 2018 |
| | | Income (Loss) |
| | Shares |
| | Per Share Amount |
| | Income (Loss) |
| | Shares |
| | Per Share Amount |
|
| | | (in thousands, except per share amounts) |
| Basic: | | | | | | | | | | | | |
| Net income (loss) | | $ | 581 |
| | 24,717 |
| | $ | 0.02 |
| | $ | (1,609 | ) | | 24,483 |
| | $ | (0.07 | ) |
| Unvested restricted stock units | | | | 336 |
| | | | | | 398 |
| | |
| Dilutive stock options outstanding | | | | — |
| | | | | | 294 |
| | |
| Diluted: | | | | | | | | | | | | |
| Net income (loss) | | $ | 581 |
| | 25,053 |
| | $ | 0.02 |
| | $ | (1,609 | ) | | 25,175 |
| | $ | (0.07 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | Nine Months Ended
September 30, 2019 | | Nine Months Ended
September 30, 2018 |
| | | Income |
| | Shares |
| | Per Share Amount |
| | Income |
| | Shares |
| | Per Share Amount |
|
| | | (in thousands, except per share amounts) |
| Basic: | | | | | | | | | | | | |
| Net income (loss) | | $ | 4,736 |
| | 24,689 |
| | $ | 0.19 |
| | $ | 2,958 |
| | 24,397 |
| | $ | 0.12 |
|
| Unvested restricted stock units | | | | 388 |
| | | | | | 383 |
| | |
| Dilutive stock options outstanding | | | | — |
| | | | | | 358 |
| | |
| Diluted: | | | | | | | | | | | | |
| Net income (loss) | | $ | 4,736 |
| | 25,077 |
| | $ | 0.19 |
| | $ | 2,958 |
| | 25,138 |
| | $ | 0.12 |
|
At September 30, 2019 and 2018, 487,000 and 873,708 shares of common stock, respectively, were issuable upon the exercise of options and warrants.
14. SEGMENT INFORMATION
We operate through business segments according to the nature and economic characteristics of our productsvirus, 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.potential seasonality of new outbreaks.
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 September 30, 2019 |
| | Specialty Petrochemicals |
| | Specialty Waxes |
| | Corporate |
| | Eliminations |
| | Consolidated |
|
| | (in thousands) |
| Product sales | $ | 53,277 |
| | $ | 5,834 |
| | $ | — |
| | $ | — |
| | $ | 59,111 |
|
| Processing fees | 1,208 |
| | 2,396 |
| | — |
| | — |
| | 3,604 |
|
| Total revenues | 54,485 |
| | 8,230 |
| | — |
| | — |
| | 62,715 |
|
| Operating profit (loss) before depreciation and amortization | 10,414 |
| | (260 | ) | | (2,670 | ) | | — |
| | 7,484 |
|
| Operating profit (loss) | 7,449 |
| | (1,808 | ) | | (2,683 | ) | | — |
| | 2,958 |
|
| Profit (loss) from continuing operations before taxes | 6,583 |
| | (2,071 | ) | | (2,691 | ) | | — |
| | 1,821 |
|
| Depreciation and amortization | 1,900 |
| | 1,548 |
| | 14 |
| | — |
| | 3,462 |
|
| Capital expenditures | 2,163 |
| | 361 |
| | — |
| | — |
| | 2,524 |
|
|
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2018 |
| | Specialty Petrochemicals |
| | Specialty Waxes |
| | Corporate |
| | Eliminations |
| | Consolidated |
|
| | (in thousands) |
| Product sales | $ | 61,675 |
| | $ | 6,938 |
| | $ | — |
| | — |
| | $ | 68,613 |
|
| Processing fees | 2,056 |
| | 2,799 |
| | — |
| | (52 | ) | | 4,803 |
|
| Total revenues | 63,731 |
| | 9,737 |
| | — |
| | (52 | ) | | 73,416 |
|
| Operating profit (loss) before depreciation and amortization | 6,167 |
| | 415 |
| | (2,252 | ) | | — |
| | 4,330 |
|
| Operating profit (loss) | 3,516 |
| | (936 | ) | | (2,270 | ) | | — |
| | 310 |
|
| Profit (loss) from continuing operations before taxes | 2,561 |
| | (1,239 | ) | | (2,274 | ) | | — |
| | (952 | ) |
| Depreciation and amortization | 2,651 |
| | 1,351 |
| | 16 |
| | — |
| | 4,018 |
|
| Capital expenditures | 2,562 |
| | 1,094 |
| | — |
| | — |
| | 3,656 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2019 |
| | Specialty Petrochemicals |
| | Specialty Waxes |
| | Corporate |
| | Eliminations |
| | Consolidated |
|
| | (in thousands) |
| Product sales | $ | 167,351 |
| | $ | 18,582 |
| | $ | — |
| | $ | — |
| | $ | 185,933 |
|
| Processing fees | 4,117 |
| | 7,191 |
| | — |
| | — |
| | 11,308 |
|
| Total revenues | 171,468 |
| | 25,773 |
| | — |
| | — |
| | 197,241 |
|
| Operating profit (loss) before depreciation and amortization | 31,849 |
| | (343 | ) | | (7,158 | ) | | — |
| | 24,348 |
|
| Operating profit (loss) | 22,885 |
| | (4,638 | ) | | (7,203 | ) | | — |
| | 11,044 |
|
| Profit (loss) from continuing operations before taxes | 20,093 |
| | (5,623 | ) | | (7,202 | ) | | — |
| | 7,268 |
|
| Depreciation and amortization | 7,899 |
| | 4,295 |
| | 46 |
| | — |
| | 12,240 |
|
| Capital expenditures | 5,002 |
| | 1,296 |
| | — |
| | — |
| | 6,298 |
|
|
| | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2018 |
| | Specialty Petrochemicals |
| | Specialty Waxes |
| | Corporate |
| | Eliminations |
| | Consolidated |
|
| | (in thousands) |
| Product sales | $ | 178,094 |
| | $ | 20,755 |
| | $ | — |
| | 32 |
| | $ | 198,881 |
|
| Processing fees | 5,769 |
| | 8,863 |
| | — |
| | (250 | ) | | 14,382 |
|
| Total revenues | 183,863 |
| | 29,618 |
| | — |
| | (218 | ) | | 213,263 |
|
| Operating profit (loss) before depreciation and amortization | 20,655 |
| | 1,969 |
| | (5,234 | ) | | — |
| | 17,390 |
|
| Operating profit (loss) | 14,635 |
| | (2,051 | ) | | (5,268 | ) | | — |
| | 7,316 |
|
| Profit (loss) from continuing operations before taxes | 12,474 |
| | (2,926 | ) | | (5,205 | ) | | — |
| | 4,343 |
|
| Depreciation and amortization | 6,020 |
| | 4,020 |
| | 32 |
| | — |
| | 10,072 |
|
| Capital expenditures | 16,374 |
| | 2,716 |
| | — |
| | — |
| | 19,090 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | September 30, 2019 |
| | Specialty Petrochemicals |
| | Specialty Waxes |
| | Corporate |
| | Eliminations |
| | Consolidated |
|
| | (in thousands) |
| Trade receivables, product sales | $ | 19,129 |
| | $ | 4,081 |
| | $ | — |
| | $ | — |
| | $ | 23,210 |
|
| Trade receivables, processing fees | 517 |
| | 1,770 |
| | — |
| | — |
| | 2,287 |
|
| Goodwill and intangible assets, net | — |
| | 39,349 |
| | — |
| | — |
| | 39,349 |
|
| Total assets | 293,098 |
| | 113,007 |
| | 90,174 |
| | (165,722 | ) | | 330,557 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2018 |
| | Specialty Petrochemicals |
| | Specialty Waxes |
| | Corporate |
| | Eliminations |
| | Consolidated |
|
| | (in thousands) |
| Trade receivables, product sales | $ | 21,915 |
| | $ | 3,173 |
| | $ | — |
| | $ | — |
| | $ | 25,088 |
|
| Trade receivables, processing fees | 633 |
| | 1,391 |
| | — |
| | — |
| | 2,024 |
|
| Goodwill and intangible assets, net | — |
| | 40,745 |
| | — |
| | — |
| | 40,745 |
|
| Total assets | 284,367 |
| | 115,366 |
| | 91,474 |
| | (161,239 | ) | | 329,968 |
|
15. POST-RETIREMENT OBLIGATIONS
We currently have post-retirement obligations with two former executives. As of September 30, 2019 and December 31, 2018, approximately $0.3 million and $0.4 million, respectively, remained outstanding and was included in post-retirement obligations.
For additional information, see Note 22, “Post–Retirement Obligations” to the consolidated financial statements set forth in our Annual Report on Form 10–K for the year ended December 31, 2018.
16. INVESTMENT IN AMAK (Held-for-Sale)
As of September 30, 2019 and December 31, 2018, the Company had a non-controlling equity interest of 33.3% and 33.4% in AMAK of approximately $34.1 million and $38.7 million, respectively. This investment is accounted for under the equity method. There were no events or changes in circumstances that may have an adverse effect on the fair value of our investment in AMAK at September 30, 2019.
The Company committed to a plan to sell our investment in AMAK during the third quarter of 2019. Management engaged in an active program to market the investment which resulted in an agreement with certain AMAK shareholders in September 2019, which became effective subsequent to September 30, 2019. See discussion of the Share Sale and Purchase Agreement in Note 19.
As all the required criteria for held-for-sale classification was met at September 30, 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.
AMAK's financial statements were prepared in the functional currency of AMAK which is the Saudi Riyal ("SR"). In June 1986 the SR was officially pegged to the U. S. Dollar ("USD") at a fixed exchange rate of 1 USD to 3.75 SR.
The summarized results of operation and financial position for AMAK are as follows:
Results of Operations
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | | 2019 |
| | 2018 |
| | 2019 |
| | 2018 |
|
| | | (thousands of dollars) | | (thousands of dollars) |
| Sales | | $ | 19,643 |
| | $ | 19,877 |
| | $ | 60,873 |
| | $ | 53,458 |
|
| Cost of sales | | 19,072 |
| | 20,350 |
| | 55,804 |
| | 49,411 |
|
| Gross profit (loss) | | 571 |
| | (473 | ) | | 5,069 |
| | 4,047 |
|
| Selling, general, and administrative | | 3,557 |
| | 2,736 |
| | 9,102 |
| | 7,151 |
|
| Operating loss | | (2,986 | ) | | (3,209 | ) | | (4,033 | ) | | (3,104 | ) |
| Other income | | 43 |
| | 35 |
| | 396 |
| | 70 |
|
| Finance and interest expense | | (456 | ) | | (416 | ) | | (1,349 | ) | | (1,201 | ) |
| Loss before Zakat and income taxes | | (3,399 | ) | | (3,590 | ) | | (4,986 | ) | | (4,235 | ) |
| Zakat and income taxes | | 444 |
| | 800 |
| | 1,332 |
| | 800 |
|
| Net Loss | | $ | (3,843 | ) | | $ | (4,390 | ) | | $ | (6,318 | ) | | $ | (5,035 | ) |
Financial Position
|
| | | | | | | | |
| | | September 30, |
| | December 31, |
|
| | | 2019 |
| | 2018 |
|
| | | (thousands of dollars) |
| Current assets | | $ | 41,030 |
| | $ | 44,093 |
|
| Noncurrent assets | | 191,043 |
| | 212,291 |
|
| Total assets | | $ | 232,073 |
| | $ | 256,384 |
|
| | | | | |
| Current liabilities | | $ | 22,107 |
| | $ | 17,160 |
|
| Long term liabilities | | 74,371 |
| | 77,366 |
|
| Stockholders' equity | | 135,595 |
| | 161,858 |
|
| | | $ | 232,073 |
| | $ | 256,384 |
|
Changes in Ownership
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%.
In first quarter 2018, we completed an exchange of shares with certain stockholders whereby such stockholders traded 65,000 common shares of TREC in exchange for 24,489 shares of our AMAK stock. The 65,000 shares were accounted for as treasury stock. This transaction reduced our ownership percentage from 33.44% to 33.41%.
In connection with the 2018 AMAK share repurchase program, we received net proceeds of approximately $0.4 million during the three months ended March 31, 2019. AMAK completed the share repurchase program in 2019, at which point all shares repurchased from AMAK stockholders were registered as treasury shares. Upon completion of the share repurchase program, the Company's ownership percentage in AMAK did not change from 33.4%.
The equity in the (losses) earnings of AMAK included in loss from discontinued operations, net of tax, on the consolidated statements of operations for the three and nine months ended September 30, 2019, and 2018, is comprised of the following:
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | | 2019 |
| | 2018 |
| | 2019 |
| | 2018 |
|
| | | (thousands of dollars) | | (thousands of dollars) |
| AMAK Net Loss | | $ | (3,843 | ) | | $ | (4,390 | ) | | $ | (6,318 | ) | | $ | (5,036 | ) |
| Percentage of Ownership | | 33.29 | % | | 33.41 | % | | 33.29 | % | | 33.41 | % |
| | | | | | | | | |
| Company's share of loss reported by AMAK | | $ | (1,279 | ) | | $ | (1,467 | ) | | $ | (2,103 | ) | | $ | (1,682 | ) |
| Amortization of difference between Company's investment in AMAK and Company's share of net assets of AMAK | | 337 |
| | 337 |
| | 1,010 |
| | 1,010 |
|
| Equity in (losses) earnings of AMAK | | $ | (942 | ) | | $ | (1,130 | ) | | $ | (1,093 | ) | | $ | (672 | ) |
For additional information, see Note 10, "Investment in Al Masane Al Kobra Mining Company ("AMAK")" to the consolidated financial statements set forth in our Annual Report on Form 10–K for the year ended December 31, 2018.
17. RELATED PARTY TRANSACTIONS
Consulting fees of approximately $32,000 and $25,000 were incurred during the three months and $82,000 and $75,000 during the nine months ended September 30, 2019 and 2018, respectively, from our Director, Nicholas Carter. Due to his history and experience with the Company and to provide continuity after his retirement, a three year consulting agreement was entered into with Mr. Carter in July 2015. In March 2019, a new consulting agreement was entered into with Mr. Carter effective through December 31, 2019.
18. COMMITMENTS AND CONTINGENCIES
Guarantees
On October 24, 2010, we executed a limited guarantee in favor of the Saudi Industrial Development Fund ("SIDF") whereby we agreed to guaranty up to 41% of the SIDF loan (the "Loan") to AMAK in the principal amount of 330.0 million Saudi Riyals (US$88.0 million). The term of the Loan was originally through June 2019. As a condition of the Loan, SIDF required all stockholders of AMAK to execute personal or corporate guarantees; as a result, our guarantee is for approximately 135.3 million Saudi Riyals (US$36.1 million). The Loan was necessary to continue construction of the AMAK facilities and provide working capital needs. We received no consideration in connection with extending the guarantee and did so to maintain and enhance the value of 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 amount due in 2019 is 30.0 million Saudi Riyals (US$8.0 million). The total amount outstanding on the Loan at September 30, 2019, was 290.0 million Saudi Riyals (US$77.3 million). See additional discussion including the release of the guarantee in connection with the AMAK sale in Note 19.
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 September 30, 2020 and December 31, 2019, the value of the remaining undelivered feedstock approximated $5.0 million and $4.2 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 were approximately $0.2 million and $0.3 million for the three months ended September 30, 2020 and 2019, respectively, and 2018, were$1.2 million and $0.3 million and $0.2 million, respectively, and for the nine months ended September 30, 2019,2020 and 2018, were $0.3 million and $0.7 million,2019, respectively.
Environmental Remediation
Amounts charged to expense for various activities related to environmental monitoring, compliance, and improvements were approximately $0.2 million and $0.1$0.2 million for the three months ended September 30, 2020 and 2019, respectively, and 2018$0.7 million and $0.7 million for the nine months ended September 30, 2019,2020 and 2018, were $0.7 million and $0.4 million,2019, respectively.
19. SUBSEQUENT EVENTS13. STOCK-BASED COMPENSATION
Pursuant
The Stock Option Plan for Key Employees, as well as, the Non-Employee Director Stock Option Plan (hereinafter collectively referred to a Share Saleas 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 Purchase AgreementIncentive Plan (the “Purchase Agreement”“Plan”) that was effective asapproved by the Company’s stockholders in June 2012. As amended, the Plan allots for the issuance of October 2, 2019, the Company has agreedup to sell its entire 33.3% equity interest in AMAK, to AMAK and certain other existing shareholders of AMAK (collectively, the “Purchasers”) for an aggregate gross purchase price (before taxes and transaction expenses) of SAR 264.72.5 million (or approximately US$70 million), which will be payable in US Dollars. The Purchasers have advanced 5% of the purchase price (or approximately $3.5 million)shares in the form of a non-refundable deposit, which was a conditionstock options or restricted stock unit awards.
The Company recognized stock-based compensation expense of approximately $0.5 million and $0.3 million for the three months ended September 30, 2020 and 2019, respectively, and $1.4 million and $0.9 million for the nine months ended September 30, 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 effectivenessclosing 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 0 stock options or warrant awards issued during the three or nine months ended September 30, 2020 or 2019, respectively.
A summary of the Purchase Agreement. Asstatus 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 | 0 | | | 0 | | | | | |
| Exercised | 0 | | | 0 | | | | | |
| Forfeited | 0 | | | 0 | | | | | |
| Outstanding at September 30, 2020 | 487,000 | | | 10.87 | | | 3.0 | | $ | 0 | |
| Expected to vest | 0 | | | | | | | $ | 0 | |
| Exercisable at September 30, 2020 | 487,000 | | | 10.87 | | | 3.0 | | $ | 0 | |
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 September 30, 2019, deposits2020, options to purchase approximately 0.1 million shares of approximately $2.2 millioncommon stock were receivedin-the-money.
Since 0 options were granted, the weighted average grant-date fair value per share of options granted during the three and recorded as a reduction in our investment in AMAK. The remainder of the deposits (approximately $1.3 million) were received subsequent to nine months ended September 30, 2019.2020 and 2019, respectively, was 0.
The Purchase Agreement contains various representations, warrantiesCompany has no non-vested options as of September 30, 2020.
Restricted Stock Unit Awards
Generally, restricted stock unit awards are granted annually to officers and indemnity obligationsdirectors 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 Purchasers, includingterms 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 releaseCompany’s closing stock price on the date of grant. Restricted stock units granted generally vest ratably over 3 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 guaranteerestricted stock units activity is as describedfollows:
| | | | | | | | | | | |
| Shares of Restricted Stock Units | | Weighted Average Grant Date Price per Share |
| Outstanding at January 1, 2020 | 298,864 | | | 9.78 | |
| Granted | 364,637 | | | 6.32 | |
| Forfeited | (15,571) | | | 11.40 | |
| Vested | (71,409) | | | 8.40 | |
| Outstanding at September 30, 2020 | 576,521 | | | 7.51 | |
| Expected to vest | 576,521 | | | |
14. INCOME TAXES
We file an income tax return in Note 18.the U.S. federal jurisdiction and a margin tax return in Texas. Previously, the Texas Comptroller selected the R&D credit calculations related to the 2014 and 2015 calendar years for audit. The Purchase Agreement also contains certain termination rightsstate of Texas suspended examination of the Company, including if closing does not occur by November 25, 2019. The transaction is expected2014 and 2015 calendar years in order to close inperform a comprehensive review of audit procedures to provide consistency. During the fourth quarter of 2019, subjectwe received notice that Texas had completed review of its procedures and initiated additional requests for information. In February 2020, we received notice from the Internal Revenue Service ("IRS") regarding the IRS's selection of the Company for an income tax audit for the tax period ending December 31, 2017. We do not expect any material changes related to receiptthe federal or Texas audits. Our federal and Texas tax returns remain open for examination for the years 2016 through 2019. As of September 30, 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 nine months ended September 30, 2020 and 2019. We continue to maintain a valuation allowance against certain governmental approvalsdeferred tax assets, specifically for mining claims for PEVM, where realization is not certain.
The CARES Act provides stimulus measures to companies impacted by the COVID-19 pandemic, which include the ability to defer payment for employer payroll taxes, utilize net operating loss ("NOL") carrybacks, increased the limitation on the deductibility of interest expense, technical corrections to allow accelerated tax depreciation on qualified improvement property, as well as allowing qualified business to apply for loans and grants. We have recognized $16.5 million for the NOL carryback claims, which are included in the $16.9 million income tax receivable. On April 30, 2020 we filed our first refund claims for approximately $14.1 million and on June 30, 2020 we filed our second and final refund claims for approximately $2.4 million.
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 customary closing conditions.administrative costs.
On October 29, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2020 |
| | Specialty Petrochemicals | | Specialty Waxes | | Corporate | | Eliminations | | Consolidated |
| | (in thousands) |
| Product sales | $ | 37,580 | | | $ | 5,990 | | | $ | 0 | | | $ | 0 | | | $ | 43,570 | |
| Processing fees | 1,644 | | | 2,533 | | | 0 | | | 0 | | | 4,177 | |
| Total revenues | 39,224 | | | 8,523 | | | 0 | | | 0 | | | 47,747 | |
| Operating income (loss) before depreciation and amortization | 8,538 | | | 89 | | | (2,050) | | | 0 | | | 6,577 | |
| Operating income (loss) | 5,871 | | | (1,337) | | | (2,052) | | | 0 | | | 2,482 | |
| Income (loss) from continuing operations before taxes | 5,311 | | | (1,293) | | | (2,057) | | | 0 | | | 1,961 | |
| Depreciation and amortization | 2,667 | | | 1,427 | | | 2 | | | 0 | | | 4,096 | |
| Capital expenditures | 2,084 | | | 641 | | | 0 | | | 0 | | | 2,725 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2019 |
| | Specialty Petrochemicals | | Specialty Waxes | | Corporate | | Eliminations | | Consolidated |
| | (in thousands) |
| Product sales | $ | 53,277 | | | $ | 5,834 | | | $ | 0 | | | 0 | | | $ | 59,111 | |
| Processing fees | 1,208 | | | 2,396 | | | 0 | | | 0 | | | 3,604 | |
| Total revenues | 54,485 | | | 8,230 | | | 0 | | | 0 | | | 62,715 | |
| Operating income (loss) before depreciation and amortization | 10,414 | | | (260) | | | (2,670) | | | 0 | | | 7,484 | |
| Operating income (loss) | 7,449 | | | (1,808) | | | (2,683) | | | 0 | | | 2,958 | |
| Income (loss) from continuing operations before taxes | 6,583 | | | (2,071) | | | (2,691) | | | 0 | | | 1,821 | |
| Depreciation and amortization | 1,900 | | | 1,548 | | | 14 | | | 0 | | | 3,462 | |
| Capital expenditures | 2,163 | | | 361 | | | 0 | | | 0 | | | 2,524 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2020 |
| | Specialty Petrochemicals | | Specialty Waxes | | Corporate | | Eliminations | | Consolidated |
| | (in thousands) |
| Product sales | $ | 119,202 | | | $ | 18,258 | | | $ | 0 | | | $ | 0 | | | $ | 137,460 | |
| Processing fees | 4,047 | | | 8,981 | | | 0 | | | 0 | | | 13,028 | |
| Total revenues | 123,249 | | | 27,239 | | | 0 | | | 0 | | | 150,488 | |
| Operating income (loss) before depreciation and amortization | 20,002 | | | 2,009 | | | (6,665) | | | 0 | | | 15,346 | |
| Operating income (loss) | 12,097 | | | (2,084) | | | (6,677) | | | 0 | | | 3,336 | |
| Income (loss) from continuing operations before taxes | 9,901 | | | (1,980) | | | (6,751) | | | 0 | | | 1,170 | |
| Depreciation and amortization | 7,905 | | | 4,093 | | | 13 | | | 0 | | | 12,011 | |
| Capital expenditures | 9,067 | | | 1,242 | | | 0 | | | 0 | | | 10,309 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2019 |
| | Specialty Petrochemicals | | Specialty Waxes | | Corporate | | Eliminations | | Consolidated |
| | (in thousands) |
| Product sales | $ | 167,351 | | | $ | 18,582 | | | $ | 0 | | | 0 | | | $ | 185,933 | |
| Processing fees | 4,117 | | | 7,191 | | | 0 | | | 0 | | | 11,308 | |
| Total revenues | 171,468 | | | 25,773 | | | 0 | | | 0 | | | 197,241 | |
| Operating income (loss) before depreciation and amortization | 31,849 | | | (343) | | | (7,158) | | | 0 | | | 24,348 | |
| Operating income (loss) | 22,885 | | | (4,638) | | | (7,203) | | | 0 | | | 11,044 | |
| Income (loss) from continuing operations before taxes | 20,093 | | | (5,623) | | | (7,202) | | | 0 | | | 7,268 | |
| Depreciation and amortization | 7,899 | | | 4,295 | | | 46 | | | 0 | | | 12,240 | |
| Capital expenditures | 5,002 | | | 1,296 | | | 0 | | | 0 | | | 6,298 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2020 |
| | Specialty Petrochemicals | | Specialty Waxes | | Corporate | | Eliminations | | Consolidated |
| | (in thousands) |
| Trade receivables, product sales | $ | 16,154 | | | $ | 3,606 | | | $ | 0 | | | $ | 0 | | | $ | 19,760 | |
| Trade receivables, processing fees | 771 | | | 2,125 | | | 0 | | | 0 | | | 2,896 | |
| Intangible assets, net | 0 | | | 13,354 | | | 0 | | | 0 | | | 13,354 | |
| Total assets | 290,266 | | | 84,933 | | | 131,187 | | | (184,066) | | | 322,320 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2019 |
| | Specialty Petrochemicals | | Specialty Waxes | | Corporate | | Eliminations | | Consolidated |
| | (in thousands) |
| Trade receivables, product sales | $ | 18,911 | | | $ | 3,613 | | | $ | 0 | | | $ | 0 | | | $ | 22,524 | |
| Trade receivables, processing fees | 748 | | | 3,048 | | | 0 | | | 0 | | | 3,796 | |
| Intangible assets, net | 0 | | | 14,736 | | | 0 | | | 0 | | | 14,736 | |
| Total assets | 289,546 | | | 88,245 | | | 90,203 | | | (166,175) | | | 301,819 | |
16. NET INCOME (LOSS) PER COMMON SHARE
The following tables set forth the computation of basic and diluted net income (loss) per share for the three and nine months ended September 30, 2020 and 2019, respectively.
Net Income (Loss) per Common Share - Continuing Operations
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, 2020 | | Three Months Ended
September 30, 2019 |
| | Income | | Shares | | Per Share
Amount | | Income | | Shares | | Per Share
Amount |
| | (in thousands, except per share amounts) |
| Basic: | | | | | | | | | | | | |
| Net income from continuing operations | | $ | 1,108 | | | 24,817 | | | $ | 0.04 | | | $ | 1,583 | | | 24,717 | | | $ | 0.06 | |
| Unvested restricted stock units | | | | 577 | | | | | | | 336 | | | |
| | | | | | | | | | | | |
| Diluted: | | | | | | | | | | | | |
| Net income from continuing operations | | $ | 1,108 | | | 25,394 | | | $ | 0.04 | | | $ | 1,583 | | | 25,053 | | | $ | 0.06 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended
September 30, 2020 | | Nine Months Ended
September 30, 2019 |
| | Income | | Shares | | Per Share
Amount | | Income | | Shares | | Per Share
Amount |
| | (in thousands, except per share amounts) |
| Basic: | | | | | | | | | | | | |
| Net income from continuing operations | | $ | 5,112 | | | 24,795 | | | $ | 0.21 | | | $ | 5,856 | | | 24,689 | | | $ | 0.24 | |
| Unvested restricted stock units | | | | 384 | | | | | | | 388 | | | |
| | | | | | | | | | | | |
| Diluted: | | | | | | | | | | | | |
| Net income from continuing operations | | $ | 5,112 | | | 25,179 | | | $ | 0.20 | | | $ | 5,856 | | | 25,077 | | | $ | 0.23 | |
Net Income (Loss) per Common Share - Discontinued Operations
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended
September 30, 2020 | | Three Months Ended
September 30, 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 | | $ | 21,324 | | | 24,817 | | | $ | 0.86 | | | $ | (1,002) | | | 24,717 | | | $ | (0.04) | |
| Unvested restricted stock units | | | | 577 | | | | | | | 336 | | | |
| | | | | | | | | | | | |
| Diluted: | | | | | | | | | | | | |
| Net income (loss) from discontinued operations, net of tax | | $ | 21,324 | | | 25,394 | | | $ | 0.84 | | | $ | (1,002) | | | 25,053 | | | $ | (0.04) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Nine Months Ended
September 30, 2020 | | Nine Months Ended
September 30, 2019 |
| | Income (Loss) | | 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 | | $ | 26,179 | | | 24,795 | | | $ | 1.06 | | | $ | (1,120) | | | 24,689 | | | $ | (0.05) | |
| Unvested restricted stock units | | | | 384 | | | | | | | 388 | | | |
| | | | | | | | | | | | |
| Diluted: | | | | | | | | | | | | |
| Net income (loss) from discontinued operations, net of tax | | $ | 26,179 | | | 25,179 | | | $ | 1.04 | | | $ | (1,120) | | | 25,077 | | | $ | (0.04) | |
Net Income (Loss) per Common Share
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended
September 30, 2020 | | Three Months Ended
September 30, 2019 |
| | Income | | Shares | | Per Share
Amount | | Income | | Shares | | Per Share
Amount |
| | (in thousands, except per share amounts) |
| Basic: | | | | | | | | | | | | |
| Net income (loss) | | $ | 22,432 | | | 24,817 | | | $ | 0.90 | | | $ | 581 | | | 24,717 | | | $ | 0.02 | |
| Unvested restricted stock units | | | | 577 | | | | | | | 336 | | | |
| | | | | | | | | | | | |
| Diluted: | | | | | | | | | | | | |
| Net income (loss) | | $ | 22,432 | | | 25,394 | | | $ | 0.88 | | | $ | 581 | | | 25,053 | | | $ | 0.02 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Nine Months Ended
September 30, 2020 | | Nine Months Ended
September 30, 2019 |
| | Income (Loss) | | Shares | | Per Share
Amount | | Income (Loss) | | Shares | | Per Share
Amount |
| | (in thousands, except per share amounts) |
| Basic: | | | | | | | | | | | | |
| Net income | | $ | 31,291 | | | 24,795 | | | $ | 1.27 | | | $ | 4,736 | | | 24,689 | | | $ | 0.19 | |
| Unvested restricted stock units | | | | 384 | | | | | | | 388 | | | |
| | | | | | | | | | | | |
| Diluted: | | | | | | | | | | | | |
| Net income | | $ | 31,291 | | | 25,179 | | | $ | 1.24 | | | $ | 4,736 | | | 25,077 | | | $ | 0.19 | |
At September 30, 2020 and 2019, 0.5 million and 0.5 million shares of common stock, respectively, were issuable upon the Company experienced a severe weather event at the Specialty Petrochemicals facility in Silsbee, Texas, resulting in a plant shutdownexercise of options and significant damage to one of the feedstock tanks. The plant returned to operation November 7, 2019. warrants.
17. RELATED PARTY TRANSACTIONS
The Company is determiningincurred 0 consulting fees for the three months ended September 30, 2020 and 2019, respectively, and NaN and approximately $0.1 million for the nine months ended September 30, 2020 and 2019, respectively, from our Director, Nicholas Carter. 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 September 30, 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 impact of recovery costs and expects some loss of sales volumes.statements set forth in our Annual Report on Form 10–K for the year ended December 31, 2019.
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 are subject toinvolve 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 thosehistorical 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: general economic conditions domesticallyto the impacts of: the continued impact of the COVID-19 pandemic on our business, financial results and internationally; insufficient cash flows from operating activities; difficulties in obtaining financing; outstanding debtfinancial condition and that of our customers, suppliers, and other financial and legal obligations; lawsuits; competition; industry cycles; feedstock, product and mineral prices; feedstock availability; technological developments; regulatory changes; environmental matters; foreign government instability; foreign legal and political concepts; foreign currency fluctuations;counterparties; not completing, or not completely realizing the anticipated benefits from, the sale of our equity intereststake in AMAK; receiptgeneral economic and timingfinancial 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 the COVID-19 pandemic) and terrorist attacks; our ability to consummate extraordinary transactions, including acquisitions and dispositions, and realize the financial and strategic goals of necessary governmental approvalssuch 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 PPP Loans or failing to qualify for the saleforgiveness of our equity interestsuch loans, in AMAK;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 this report, in our latest Annual Report on Form 10–K,10-K, including but not limited to Part"Part I, Item 1A. Risk FactorsFactors" and Part"Part II, Item 7. Management’sManagement's Discussion and Analysis of Financial Condition and Results of OperationsOperations" therein, under similar headings in this Quarterly Report on Form 10-Q, and in our other filings with the SEC.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 the"Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements which appear inOperations"
of our Annual Report on Form 10-K for the year ended December 31, 2018.2019. These discussions of results reflect the continuing operations of the Company unless otherwise noted.
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 product performance and price point that is unique to our market; while the diversity of our custom processing assets and capabilities offers solutions to our customers 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 thegrowing our business while maintaining prudent control of our costs, will create value for our stockholders.significantly contribute to enhanced shareholder value.
Review of Third Quarter 20192020 Results
While our third quarter 2020 results continued to be adversely impacted by the COVID-19 pandemic due to its global impact on economic demand as compared to the third quarter of 2019, we saw moderate improvement in customer demand for both our specialty petrochemicals and specialty waxes relative to the second quarter of 2020. We reported third quarter 20192020 net income of $0.6$22.4 million, upwhich includes the net gain from the sale of AMAK of $21.3 million. Net income from continuing operations for the third quarter 2020 was $1.1 million, down 31.2% from net lossincome from continuing operations of $1.6 million in the third quarter of 2018. Diluted earnings per share are $0.02 for 2019, up from a loss per share of $(0.06) in 2018.2019. Sales volume of our Specialty Petrochemicals products decreased 4.8%, and12.9% due to lower sales to the polyethylene end-use markets as well as lower sales to Canadian oil sands customers. Sales to other end-use markets were also generally weaker compared to the same period last year due to the COVID-19 pandemic. Specialty Waxes sales revenue from our Specialty Petrochemicals products decreased 13.6% aswas up 2.7% compared to the third quarter 2018. Specialty Petrochemical sales volume declined2019 due to lower Prime product sales which declined 3.0% compared to third quarter 2018. Specialty Waxes sales revenue was down 15.9% compared towax feed supply interruptions in the third quarter 2018.of 2019. Additionally, during third quarter 2020 we utilized a portion of the net proceeds from the completion of the sale of our ownership interest in AMAK to prepay $30 million on our Term Loan Facility.
Consolidated Adjusted EBITDA from continuing operations was $4.9$7.1 million for the third quarter of 2019,2020, compared with consolidated Adjusted EBITDA from continuing operations of $3.1$6.9 million in the third quarter of 2018. Consolidated2019. Adjusted EBITDA from continuing operations increased due to substantially better performance in our Specialty Petrochemicals segment as a result of lower feedstock costs, lower operatingreduced Corporate expenses and improved plant operations. This washigher Specialty Waxes revenue, partially offset by weakerdepressed performance for Specialty Petrochemicals. Adjusted EBITDA from continuing operations is a non-GAAP financial measure. See below for additional information about this measure and a reconciliation to the most directly comparable GAAP financial measure.
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 Specialty Waxes business.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 April 17, 2020 as updated through August 18, 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.
The COVID-19 pandemic has had an impact on our business, results of operations, financial position and liquidity for the third quarter of 2020. In comparison to the same period in 2019, in the third quarter we continued to see reduced demand for our products and services in certain end markets, including durable goods such as automotive and construction, which we attribute to the economic slowdown caused by the COVID-19 pandemic. This weakened demand in certain end markets is likely to continue in the near-term and may continue into 2021, and could spread more broadly to our other end markets.
Our management will continue to actively monitor the impact of the global pandemic 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 impact on our condensed consolidated financial statements.
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-GAAPnon–GAAP measures, when read in conjunction
with our operating results presented under GAAP, can be used to better assess our performance from period to period and relative to performance of other companies in our industry, without regard to financing methods, historical cost basis or capital structure. These measures are not measures of financial performance or liquidity under GAAP and should be considered in addition to, and not as a substitute for, analysis of our results under GAAP.
EBITDA from continuing operations and Adjusted EBITDA from continuing operations: We define EBITDA from continuing operations as net income (loss) from continuing operations plus interest expense, income taxes,tax expense (benefit), depreciation and amortization. We define Adjusted EBITDA from continuing operations as EBITDA from continuing operations plus stock-basedshare-based compensation, plus restructuring and severance expenses, plus impairment losses on extinguishment of debt, and plus or minus gains or losses on acquisitions.disposal of fixed 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
September 30, 2019 |
| | Specialty Petrochemicals | | Specialty Waxes | | Corporate | | Consolidated |
| | (in thousands) |
| Net Income (Loss) | $ | 6,278 |
| | $ | (2,071 | ) | | $ | (3,626 | ) | | $ | 581 |
|
| Loss from discontinued operations, net of tax | — |
| | — |
| | (1,002 | ) | | (1,002 | ) |
| Income (Loss) from continuing operations | $ | 6,278 |
| | $ | (2,071 | ) | | $ | (2,624 | ) | | $ | 1,583 |
|
| Interest | 895 |
| | 316 |
| | — |
| | 1,211 |
|
| Taxes | 803 |
| | — |
| | (565 | ) | | 238 |
|
| Depreciation and amortization | 171 |
| | 24 |
| | 13 |
| | 208 |
|
| Depreciation and amortization in cost of sales | 1,729 |
| | 1,524 |
| | 1 |
| | 3,254 |
|
| EBITDA from continuing operations | $ | 9,876 |
| | $ | (207 | ) | | $ | (3,175 | ) | | $ | 6,494 |
|
| Stock-based compensation | — |
| | — |
| | 415 |
| | 415 |
|
| Adjusted EBITDA from continuing operations | $ | 9,876 |
| | $ | (207 | ) | | $ | (2,760 | ) | | $ | 6,909 |
|
| | | | Three Months Ended
September 30, 2018 | | Three Months Ended
September 30, 2020 |
| | Specialty Petrochemicals | | Specialty Waxes | | Corporate | | Consolidated | | Specialty Petrochemicals | | Specialty Waxes | | Corporate | | Consolidated |
| | (in thousands) | | (in thousands) |
| Net Income (Loss) | $ | 2,504 |
| | $ | (1,239 | ) | | $ | (2,874 | ) | | $ | (1,609 | ) | Net Income (Loss) | $ | 4,161 | | | $ | (1,267) | | | $ | 19,538 | | | $ | 22,432 | |
| Loss from discontinued operations, net of tax | — |
| | — |
| | (893 | ) | | (893 | ) | |
| Income (Loss) from continuing operations | $ | 2,504 |
| | $ | (1,239 | ) | | $ | (1,981 | ) | | $ | (716 | ) | |
| Income from discontinued operations, net of tax | | Income from discontinued operations, net of tax | — | | | — | | | 21,324 | | | 21,324 | |
| Income (loss) from continuing operations | | Income (loss) from continuing operations | $ | 4,161 | | | $ | (1,267) | | | $ | (1,786) | | | $ | 1,108 | |
| Interest | 659 |
| | 265 |
| | — |
| | 924 |
| Interest | 507 | | | — | | | 1 | | | 508 | |
| Taxes | 372 |
| | — |
| | (608 | ) | | (236 | ) | |
| Income tax expense (benefit) | | Income tax expense (benefit) | 1,150 | | | (26) | | | (271) | | | 853 | |
| Depreciation and amortization | 165 |
| | 24 |
| | 16 |
| | 205 |
| Depreciation and amortization | 183 | | | 24 | | | 3 | | | 210 | |
| Depreciation and amortization in cost of sales | 2,486 |
| | 1,327 |
| | — |
| | 3,813 |
| Depreciation and amortization in cost of sales | 2,484 | | | 1,403 | | | — | | | 3,887 | |
| EBITDA from continuing operations | $ | 6,186 |
| | $ | 377 |
| | $ | (2,573 | ) | | $ | 3,990 |
| EBITDA from continuing operations | $ | 8,485 | | | $ | 134 | | | $ | (2,053) | | | $ | 6,566 | |
| Stock-based compensation | — |
| | — |
| | 630 |
| | 630 |
| Stock-based compensation | — | | | — | | | 489 | | | 489 | |
| Loss on extinguishment of debt | — |
| | — |
| | 315 |
| | 315 |
| |
| | Adjusted EBITDA from continuing operations | $ | 6,186 |
| | $ | 377 |
| | $ | (1,628 | ) | | $ | 4,935 |
| Adjusted EBITDA from continuing operations | $ | 8,485 | | | $ | 134 | | | $ | (1,564) | | | $ | 7,055 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, 2019 |
| Specialty Petrochemicals | | Specialty Waxes | | Corporate | | Consolidated |
| (in thousands) |
| Net Income (Loss) | $ | 6,278 | | | $ | (2,071) | | | $ | (3,626) | | | $ | 581 | |
| Loss from discontinued operations, net of tax | — | | | — | | | (1,002) | | | (1,002) | |
| Income (Loss) from continuing operations | $ | 6,278 | | | $ | (2,071) | | | $ | (2,624) | | | $ | 1,583 | |
| Interest | 895 | | | 316 | | | — | | | 1,211 | |
| Income tax expense (benefit) | 303 | | | — | | | (76) | | | 227 | |
| Depreciation and amortization | 171 | | | 24 | | | 13 | | | 208 | |
| Depreciation and amortization in cost of sales | 1,729 | | | 1,524 | | | 1 | | | 3,254 | |
| EBITDA from continuing operations | $ | 9,376 | | | $ | (207) | | | $ | (2,686) | | | $ | 6,483 | |
| Stock-based compensation | — | | | — | | | 415 | | | 415 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Adjusted EBITDA from continuing operations | $ | 9,376 | | | $ | (207) | | | $ | (2,271) | | | $ | 6,898 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended
September 30, 2020 |
| Specialty Petrochemicals | | Specialty Waxes | | Corporate | | Consolidated |
| (in thousands) |
| Net Income | $ | 10,150 | | | $ | (385) | | | $ | 21,526 | | | $ | 31,291 | |
| Income from discontinued operations, net of tax | — | | | — | | | 26,179 | | | 26,179 | |
| Income (loss) from continuing operations | $ | 10,150 | | | $ | (385) | | | $ | (4,653) | | | $ | 5,112 | |
| Interest | 2,158 | | | — | | | 1 | | | 2,159 | |
| Income tax benefit | (249) | | | (1,595) | | | (2,098) | | | (3,942) | |
| Depreciation and amortization | 554 | | | 71 | | | 13 | | | 638 | |
| Depreciation and amortization in cost of sales | 7,351 | | | 4,022 | | | — | | | 11,373 | |
| EBITDA from continuing operations | $ | 19,964 | | | $ | 2,113 | | | $ | (6,737) | | | $ | 15,340 | |
| Stock-based compensation | — | | | — | | | 1,422 | | | 1,422 | |
| (Gain) Loss on disposal of assets | (8) | | | 17 | | | — | | | 9 | |
| | | | | | | |
| | | | | | | |
| Adjusted EBITDA from continuing operations | $ | 19,956 | | | $ | 2,130 | | | $ | (5,315) | | | $ | 16,771 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended
September 30, 2019 |
| Specialty Petrochemicals | | Specialty Waxes | | Corporate | | Consolidated |
| (in thousands) |
| Net Income (Loss) | $ | 17,086 | | | $ | (5,623) | | | $ | (6,727) | | | $ | 4,736 | |
| Loss from discontinued operations, net of tax | — | | | — | | | (1,120) | | | (1,120) | |
| Income (loss) from continuing operations | $ | 17,086 | | | $ | (5,623) | | | $ | (5,607) | | | $ | 5,856 | |
| Interest | 3,143 | | | 967 | | | 1 | | | 4,111 | |
| Income tax expense (benefit) | 3,006 | | | — | | | (1,594) | | | 1,412 | |
| Depreciation and amortization | 512 | | | 72 | | | 45 | | | 629 | |
| Depreciation and amortization in cost of sales | 7,387 | | | 4,223 | | | 1 | | | 11,611 | |
| EBITDA from continuing operations | $ | 31,134 | | | $ | (361) | | | $ | (7,154) | | | $ | 23,619 | |
| Stock-based compensation | — | | | — | | | 973 | | | 973 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Adjusted EBITDA from continuing operations | $ | 31,134 | | | $ | (361) | | | $ | (6,181) | | | $ | 24,592 | |
|
| | | | | | | | | | | | | | | |
| | Nine Months Ended
September 30, 2019 |
| | Specialty Petrochemicals | | Specialty Waxes | | Corporate | | Consolidated |
| | (in thousands) |
| Net Income (Loss) | $ | 17,086 |
| | $ | (5,623 | ) | | $ | (6,727 | ) | | $ | 4,736 |
|
| Loss from discontinued operations, net of tax | — |
| | — |
| | (1,120 | ) | | (1,120 | ) |
| Income (Loss) from continuing operations | $ | 17,086 |
| | $ | (5,623 | ) | | $ | (5,607 | ) | | $ | 5,856 |
|
| Interest | 3,143 |
| | 967 |
| | 1 |
| | 4,111 |
|
| Taxes | 3,006 |
| | — |
| | (1,594 | ) | | 1,412 |
|
| Depreciation and amortization | 512 |
| | 72 |
| | 45 |
| | 629 |
|
| Depreciation and amortization in cost of sales | 7,387 |
| | 4,223 |
| | 1 |
| | 11,611 |
|
| EBITDA from continuing operations | $ | 31,134 |
| | $ | (361 | ) | | $ | (7,154 | ) | | $ | 23,619 |
|
| Stock-based compensation | — |
| | — |
| | 973 |
| | 973 |
|
| Adjusted EBITDA from continuing operations | $ | 31,134 |
| | $ | (361 | ) | | $ | (6,181 | ) | | $ | 24,592 |
|
|
| | | | | | | | | | | | | | | |
| | Nine Months Ended
September 30, 2018 |
| | Specialty Petrochemicals | | Specialty Waxes | | Corporate | | Consolidated |
| | (in thousands) |
| Net Income (Loss) | $ | 10,402 |
| | $ | (2,926 | ) | | $ | (4,518 | ) | | $ | 2,958 |
|
| Loss from discontinued operations, net of tax | — |
| | — |
| | (531 | ) | | (531 | ) |
| Income (Loss) from continuing operations | $ | 10,402 |
| | $ | (2,926 | ) | | $ | (3,987 | ) | | $ | 3,489 |
|
| Interest | 1,892 |
| | 802 |
| | (77 | ) | | 2,617 |
|
| Taxes | 2,387 |
| | — |
| | (1,533 | ) | | 854 |
|
| Depreciation and amortization | 492 |
| | 68 |
| | 32 |
| | 592 |
|
| Depreciation and amortization in cost of sales | 5,528 |
| | 3,952 |
| | — |
| | 9,480 |
|
| EBITDA from continuing operations | $ | 20,701 |
| | $ | 1,896 |
| | $ | (5,565 | ) | | $ | 17,032 |
|
| Stock-based compensation | — |
| | — |
| | 1,002 |
| | 1,002 |
|
| Loss on extinguishment of debt | — |
| | — |
| | 315 |
| | 315 |
|
| Adjusted EBITDA from continuing operations | $ | 20,701 |
| | $ | 1,896 |
| | $ | (4,248 | ) | | $ | 18,349 |
|
Liquidity and Capital Resources
Working Capital
Our approximate working capital days are summarized as follows:
| | | | | | | | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 | | September 30, 2019 |
| Days sales outstanding in accounts receivable | 43.7 | | | 37.1 | | | 35.5 | |
| Days sales outstanding in inventory | 21.4 | | | 19.2 | | | 18.4 | |
| Days sales outstanding in accounts payable | 24.7 | | | 20.6 | | | 14.1 | |
| Days of working capital | 40.4 | | | 35.7 | | | 39.8 | |
|
| | | | | | | | |
| | September 30, 2019 |
| | December 31, 2018 |
| | September 30, 2018 |
|
| Days sales outstanding in accounts receivable | 35.5 |
| | 34.4 |
| | 38.1 |
|
| Days sales outstanding in inventory | 18.4 |
| | 21.0 |
| | 22.8 |
|
| Days sales outstanding in accounts payable | 14.1 |
| | 24.2 |
| | 17.0 |
|
| Days of working capital | 39.8 |
| | 31.1 |
| | 43.9 |
|
Our days sales outstanding in accounts receivable at September 30, 20192020 was 35.543.7 days compared to 34.437.1 days at December 31, 2018,2019. The increase was driven by slightly higher Specialty Petrochemicals sales volumes inat both segments at the quarter.end of the third quarter of 2020. Our days sales outstanding in inventory decreasedincreased by approximately 2.62.2 days from December 31, 2018.2019, driven primarily by lower sales. Our days sales outstanding in accounts payable decreasedincreased primarily due to payment for the Advanced Reformer unit catalyst replacement which was completed in December 2018, severance payments and payment for supplemental wax feed.a reduced payable to our feedstock supplier driven by lower feedstock prices. Since days of working capital is calculated using the above three metrics, it increased for the aforementioned reasons discussed.
Cash increased $2.4 million during the nine months endedOur cash balance at September 30, 2019, as compared to a decrease2020 was $51.9 million, an increase of $1.7$42.7 million for the nine months endedfrom September 30, 2018.2019. Our cash balance at September 30, 2020 included $68.5 million of proceeds from the completion of the Share Sale (net of the deposit previously paid) and PPP Loans of $6.1 million as well as net debt reduction of $33.3 million.
The change in cash is summarized as follows:
| | | | | | | | | | | | | | |
| | Nine Months Ended
September 30, |
| | | 2020 | | 2019 |
| Net cash provided by (used in) | | (thousands of dollars) |
| Operating activities | | $ | 17,575 | | | $ | 20,249 | |
| Investing activities | | 58,371 | | | (4,254) | |
| Financing activities | | (30,229) | | | (13,573) | |
| Increase (decrease) in cash | | $ | 45,717 | | | $ | 2,422 | |
| Cash | | $ | 51,862 | | | $ | 9,157 | |
|
| | | | | | | | |
| | | Nine Months Ended
September 30, |
| | | 2019 |
| | 2018 |
|
| Net cash provided by (used in) | | (thousands of dollars) |
| Operating activities | | $ | 20,249 |
| | $ | 11,110 |
|
| Investing activities | | (4,254 | ) | | (19,204 | ) |
| Financing activities | | (13,573 | ) | | 6,358 |
|
| Increase (Decrease) in cash | | $ | 2,422 |
| | $ | (1,736 | ) |
| Cash | | $ | 9,157 |
| | $ | 1,292 |
|
Operating Activities
Cash provided by operating activities totaled $20.2$17.6 million for the first nine months of 2019, $9.12020, $2.7 million higherlower than the corresponding period in 2018.2019. For the first nine months of 20192020 net income increased by approximately $1.8$26.6 million as compared to the corresponding period in 2018.2019. Major non-cash items affecting 2019income in the first nine months of 2020 included changes in depreciation and amortization of $12.0 million, deferred taxes of $14.2 million and stock-based compensation of $1.4 million. Major non-cash items affecting income in the first nine months of 2019 included increases in depreciation and amortization of $12.3 million, deferred taxes of $1.3 million and stock-based compensation of $0.9 million. Major non-cash items affecting 2018 income in the first nine months of 2018 included increases in deferred taxes of $1.1 million and depreciation and amortization of $10.0$12.3 million.
Additional factors leading to an increasethe decrease in cash provided by operating activities included:
•Under the CARES Act, 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 $16.7 million. On April 30, 2020 we filed our first refund claims for approximately $14.1 million and on June 30, 2020 we filed our second and final refund claims for approximately $2.4 million.
•Trade receivables decreased approximately $1.6$3.7 million. This wasis due to a decrease in revenues inlower sales within the third quarter 2019 of $6.7 million, or nearly 9.6%, as compared with the second quarter 2019. Revenues in the third quarter 2018 increased $5.3 million from the second quarter 2018.and we do not expect any collection issues at this time.
•Inventories decreased approximately $3.3$2.5 million driven by lower inventory in transit primarily due to lower sales tovalues associated with the Canadian oil sands and an overall decreasedecline in value of inventory due to lower feedstock prices. Additionally, our Specialty Wax segment was constrained by disruptions of wax feed supply from a key supplier, resulting in increased sales of existing inventory.
In the first nine months of 2019, we did not have a change in taxes receivable. In the same period of 2018, we collected outstanding taxes receivable of $4.3 million related to prior periods and R&D credits.
•Accounts payable and accrued liabilities decreased $6.0$1.0 million primarily due to paymenta reduced payable to our feedstock supplier driven by lower feedstock prices, as well as payments to vendors int he first quarter of 2020 for costs associated with the Advanced Reformer unit catalyst replacement which was completedweather event in December 2018, severance payments and payment for supplemental wax feed.the fourth quarter of 2019.
Investing Activities
Cash used inprovided by investing activities during the first nine months of 20192020 was approximately $4.3$58.4 million, representing a decreasean increase of approximately $15.0$62.6 million from the corresponding period of 2018. During2019. The primary source of the first nine months of 2019, the primary use of capital expendituresfunds provided by investing activities was for Advanced Reformer unit improvements and pipeline maintenance at SHR and equipment modifications at TC. This was offset by $1.3$68.5 million of proceeds, received from AMAK fornet of the repurchase of shares as discussed in Note 10 on our Annual Report on Form 10-K for the year ending December 31, 2018. In addition, $2.2 million related to the deposit wasdeposits previously paid, received in connection with the sale of our investment in AMAKShare Sale, discussed in Note 16. Our foreign tax liability resulting from AMAK's share repurchase program was $0.95, offset by additions of plant, pipeline and equipment of approximately $10.3 million. The cash to pay these taxes was withheld from the proceeds and paid directly by AMAK. As such, net cash received from AMAK was $0.4 million. During the first nine months of 2018, we had capital expenditures related to the hydrogenation/distillation unit and the Advanced Reformer unit along with various other facility improvements.
Financing Activities
Cash used in financing activities during the first nine months of 20192020 was approximately $13.6$30.2 million versus cash provided by financing activities of $6.4$13.6 million during the corresponding period of 2018.2019. In the first quarter of 2020, we drew $20.0 million under our Revolving Facility as a precaution in light of the uncertainty caused by the COVID–19 pandemic. We also received PPP Loans of $6.1 million to maintain the continuity of our workforce, including maintaining compensation and benefits. Utilizing a portion of the net proceeds from the sale of our investment in AMAK, together with cash on hand, we repaid our outstanding balance on our Revolving Facility of $23 million at the end of the second quarter and further reduced our debt with a $30 million prepayment toward our Term Loan Facility. We also made mandatory payments of $3.3 million on our Term Loan Facility. During the first nine months of 2019, we made principal payments on our outstanding credit facilitiesCredit Facilities of $15.3 million. We drew $2.0 million on our line of credit for working capital purposes duringin the first nine months of 2019. During 2018, we made principal payments on our acquisition loan of $3.5 million, our term debt of $0.7 million, and our line of credit facility of $8.1 million. We drew $18.2 million on our line of credit in the first nine months of 2018 to fund ongoing capital projects.
Subsequent to September 30, 2019, we made an optional principal payment of $5.0 million against the Revolving Facility, reducing the outstanding amount from $8.0 million to $3.0 million.
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. As of September 30, 2020, we have approximately $51.9 million in cash, combined with an available balance on our Revolving Facility of approximately $56 million. We also benefited from certain provisions of the CARES Act, including certain changes to U.S. tax law and borrowings under the PPP Loans that we believed were essential to support the continuity of our workforce. As a result, we believe that the Company is capable of supportingable to support its operating requirements and capital expenditures through internally generated funds supplemented with borrowingscash on our balance sheet and availability under our ARC Agreement.
Results of Operations
Comparison of Three Months Ended September 30, 20192020 and 20182019
Specialty Petrochemicals Segment
| | | | | | | | | | | | Three Months Ended September 30, |
| | | Three Months Ended September 30, | | | 2020 | | 2019 | | Change | | % Change |
| | | 2019 |
| | 2018 |
| | Change |
| | % Change |
| | | (thousands of dollars) |
| | | (thousands of dollars) | |
| Specialty Petrochemicals Product Sales | | $ | 53,277 |
| | $ | 61,675 |
| | $ | (8,398 | ) | | (13.6 | )% | |
| Product Sales | | Product Sales | | $ | 37,580 | | | $ | 53,277 | | | $ | (15,697) | | | (29.5) | % |
| Processing | | 1,208 |
| | 2,056 |
| | (848 | ) | | (41.2 | )% | Processing | | 1,644 | | | 1,208 | | | 436 | | | 36.1 | % |
| Gross Revenue | | $ | 54,485 |
| | $ | 63,731 |
| | $ | (9,246 | ) | | (14.5 | )% | Gross Revenue | | $ | 39,224 | | | $ | 54,485 | | | $ | (15,261) | | | (28.0) | % |
| | | | | | | | | | |
| Volume of Sales (gallons) | | | | | | | | | Volume of Sales (gallons) | |
| Specialty Petrochemicals Products | | 20,523 |
| | 21,564 |
| | (1,041 | ) | | (4.8 | )% | Specialty Petrochemicals Products | | 17,868 | | | 20,523 | | | (2,655) | | | (12.9) | % |
| Prime Product Sales | | 16,431 |
| | 16,986 |
| | (555 | ) | | (3.3 | )% | Prime Product Sales | | 14,734 | | | 16,431 | | | (1,697) | | | (10.3) | % |
| By-product Sales | | By-product Sales | | 3,134 | | | 4,092 | | | (958) | | | (23.4) | % |
| | | | | | | | | | |
| Cost of Sales | | $ | 44,206 |
| | $ | 57,156 |
| | (12,950 | ) | | (22.7 | )% | Cost of Sales | | $ | 30,732 | | | $ | 44,206 | | | (13,474) | | | (30.5) | % |
| Gross Margin | | 18.9 | % | | 10.3 | % | | | | 8.6 | % | Gross Margin | | 21.7 | % | | 18.9 | % | | 2.8 | % |
| Total Operating Expense* | | 17,248 |
| | 18,673 |
| | (1,425 | ) | | (7.6 | )% | Total Operating Expense* | | 17,122 | | | 17,248 | | | (126) | | | (0.7) | % |
| Natural Gas Expense* | | 1,000 |
| | 1,265 |
| | (265 | ) | | (20.9 | )% | Natural Gas Expense* | | 867 | | | 1,000 | | | (133) | | | (13.3) | % |
| Operating Labor Costs* | | 3,619 |
| | 4,837 |
| | (1,218 | ) | | (25.2 | )% | Operating Labor Costs* | | 4,046 | | | 3,619 | | | 427 | | | 11.8 | % |
| Transportation Costs* | | 6,997 |
| | 7,126 |
| | (129 | ) | | (1.8 | )% | Transportation Costs* | | 5,645 | | | 6,997 | | | (1,352) | | | (19.3) | % |
| General & Administrative Expense | | 2,659 |
| | 2,893 |
| | (234 | ) | | (8.1 | )% | General & Administrative Expense | | 2,438 | | | 2,659 | | | (221) | | | (8.3) | % |
| Depreciation and Amortization** | | 1,900 |
| | 2,651 |
| | (751 | ) | | (28.3 | )% | Depreciation and Amortization** | | 2,667 | | | 1,900 | | | 767 | | | 40.4 | % |
| Capital Expenditures | | 2,163 |
| | 2,562 |
| | (399 | ) | | (15.6 | )% | Capital Expenditures | | 2,084 | | | 2,163 | | | (79) | | | (3.7) | % |
* Included in cost of sales
**Includes $2,484 and $1,729 for 2020 and $2,486 for 2019, and 2018, respectively, which is included in operating expense
Gross Revenue
Gross Revenue for our Specialty Petrochemicals segment decreased during the third quarter 20192020 from the third quarter 20182019 by 14.5% primarily due to an 4.8% decrease in sales volume, a 9.2% decline in average selling price due mainly to lower feedstock costs and lower processing revenues.
Specialty Petrochemicals Product Sales
Specialty Petrochemicals product sales declined approximately 13.6% during the third quarter 2019 from the third quarter 2018 mainly due to lower product prices for prime products and by-products. Lower prices were primarily driven by lower feedstock costs. Prime product sales volume declined about 3.3% compared to the third quarter of 2018. Compared to the second quarter of 2019 prime product volume declined about 7.3% or about 1.3 million gallons28.0% primarily due to lower sales volumes for prime products and by-products which continued to be impacted by the COVID-19 pandemic. Also, gross revenue was reduced by lower selling prices resulting from a decrease in feedstock costs relative to the same period a year ago.
Product Sales
Specialty Petrochemicals segment product sales declined approximately 29.5% during the third quarter 2020 from the third quarter 2019. Prime products sales volume declined approximately 1.7 million gallons, or 10.3%, from the third quarter 2019 due to lower demand from polyethylene end-use markets as well as lower sales to Canadian oil sands and an unplanned outage at a major customer. The sales outlookcustomers. Sales to other end-use markets were also generally weaker compared to the Canadian oil sands continues to remain uncertainsame period last year due to the government mandated crude production curtailments in Canada andCOVID-19 pandemic. Prime product sales volume increased approximately 1.6 million gallons as compared to the crude oil pricing environment. Also, we expect a decline in sales demand due to typical market seasonality in many of end-use markets.
second quarter 2020. By-product sales volumes in third quarter 20192020 declined 10.6% from23.4% compared to the third quarter 2018. By-product sales volume increased 10.1% from second quarter 2019 mainly due to an increase in feed to the Advanced Reformer unit which produces by-products. In the second quarter 2019 feed to the Advanced Reformer was diverted to maximizelower prime product production to meet certain customer needs . It should be noted that by-productsand sales. By-products are produced as a result of prime product production and their margins are significantly lower than margins for our prime products. Foreign sales volume increased to 22.4%24.6% of total Specialty Petrochemicals volume in the third quarter of 2019,for 2020 from 21.5%22.4% in the third quarter 2018.2019. Foreign sales volume includes sales to the Canadian oil sands.sands customers.
Processing
Processing revenues decreased approximately $0.8were $1.6 million or 41.2% in the third quarter 2019 from2020 compared to $1.2 million for the third quarter 2018 primarily due to the termination of a customer contract in the fourth quarter 2018.2019.
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.
Cost of Sales declined 22.7%30.5% during the third quarter 20192020 from the third quarter 2018.2019. The decline of approximately $13 million in cost of sales compared to the same period last year was largely due todriven by depressed sales volumes, lower feedstock costs and lower operating expenses –primarily transportation and natural gas costs. Benchmark MountMont Belvieu natural gasoline feedstock price declined 31%24% from $1.54$1.06 per gallon in third quarter 2019 to $0.80 per gallon in the third quarter of 2018 to $1.06 per gallon2020. Our margin for prime products increased in the third quarter of 2019. Compared2020 as a result of the significant decline in feedstock cost compared to the secondthird quarter of 2019. While feedstock costs were lower in third quarter 2020 compared to third quarter 2019, benchmark Mount Belvieu natural gasolinewe did see an increase in feedstock price forcosts throughout the third quarter 2019 declined 12%. Natural gasoline feedstock pricing historically has been volatile. We sell our prime products under both formula-based pricing, where feedstock costs are passed through2020 as compared to second quarter 2020. By-product margins were materially lower compared to third quarter 2019. This was primarily due to lower component prices combined with the customer, and spot or non-formula-based pricing, which do not have pricing formulas tiedinability to feedstock costs. Formula-based pricing is used to selltake full advantage during the majorityquarter of our prime products.the product upgrade capability of the Advanced Reformer unit.
The gross margin percentage for the Specialty Petrochemicals Segmentsegment increased from 10.3% in the third quarter of 2018 to 18.9% in the third quarter of 2019 driven by lower feedstock costs, lower operating expenses andto 21.7% in the third quarter of 2020 primarily because of improved margins over feed for by-products.prime product margins.
Total Operating Expense(includes but is not limited to natural gas, operating labor, depreciation and transportation)
Total Operating Expense decreased $1.4$0.1 million, or 7.6%0.7%, during the third quarter 20192020 from 2018. There were several key drivers for the decrease, including lower labor costs, lower natural gas costs and lower transportation costs. Labor costs were lower mainly due to the cost reduction program implemented at SHRsame period in December 2018.2019.
Capital Expenditures
Capital expenditures in the third quarter 20192020 were approximately $2.2$2.1 million compared to $2.6$2.2 million in the third quarter of 2018. Following the completion2019. Third quarter 2020 included approximately $0.5 million for rebuild and repair of the Advanced Reformer unit in the second quarter of 2018, capital expenditures mainly include routine plant maintenance and environmental, health and safety (EH&S) projects.a feedstock tank.
| | | | | Three Months Ended September 30, | | Three Months Ended September 30, |
| | | 2019 |
| | 2018 |
| | Change |
| | % Change |
| | 2020 | | 2019 | | Change | | % Change |
| | | (thousands of dollars) | | (thousands of dollars) |
| Product Sales | | $ | 5,834 |
| | $ | 6,938 |
| | $ | (1,104 | ) | | (15.9 | )% | Product Sales | | $ | 5,990 | | | $ | 5,834 | | | $ | 156 | | | 2.7 | % |
| Processing | | 2,396 |
| | 2,799 |
| | (403 | ) | | (14.4 | )% | Processing | | 2,533 | | | 2,396 | | | 137 | | | 5.7 | % |
| Gross Revenue | | $ | 8,230 |
| | $ | 9,737 |
| | $ | (1,507 | ) | | (15.5 | )% | Gross Revenue | | $ | 8,523 | | | $ | 8,230 | | | $ | 293 | | | 3.6 | % |
| | | | | | | | | | |
| Volume of specialty wax sales (thousand pounds) | | 8,649 |
| | 9,055 |
| | (406 | ) | | (4.5 | )% | Volume of specialty wax sales (thousand pounds) | | 8,821 | | | 8,649 | | | 172 | | | 2.0 | % |
| | | | | | | | | | |
| Cost of Sales | | $ | 8,879 |
| | $ | 9,470 |
| | $ | (591 | ) | | (6.2 | )% | Cost of Sales | | $ | 8,558 | | | $ | 8,879 | | | $ | (321) | | | (3.6) | % |
| Gross Margin (Loss) | | (7.9 | )% | | 2.7 | % | | | | (10.6 | )% | Gross Margin (Loss) | | (0.4) | % | | (7.9) | % | | 7.5 | % |
| General & Administrative Expense | | 1,071 |
| | 1,180 |
| | (109 | ) | | (9.2 | )% | General & Administrative Expense | | 1,278 | | | 1,071 | | | 207 | | | 19.3 | % |
| Depreciation and Amortization* | | 1,548 |
| | 1,351 |
| | 197 |
| | 14.6 | % | Depreciation and Amortization* | | 1,427 | | | 1,548 | | | (121) | | | (7.8) | % |
| Capital Expenditures | | $ | 361 |
| | $ | 1,094 |
| | $ | (733 | ) | | (67.0 | )% | Capital Expenditures | | $ | 641 | | | $ | 361 | | | $ | 280 | | | 77.6 | % |
*Includes $1,403 and $1,524 for 2020 and $1,327 for 2019, and 2018, respectively, which is included in cost of sales
Product Sales
For the Specialty Wax Segment Product sales revenue decreased 15.9%for the Specialty Waxes segment increased 2.7% during the third quarter 20192020 from the third quarter 20182019 as specialty wax sales volume declined 4.5%.increased nearly 0.2 million pounds. In the third quarter 2019 wax sales were depressed due to disruptions to feed supply. There were no material feed supply disruptions during the third quarter of 2020. Wax sales were constrained by disruptions of wax feed supply from a key suppliersvolume in the third quarter 2020 increased approximately 0.5 million pounds as they experienced their own operating difficulties.compared to second quarter 2020. However, we continued to see weakness in domestic customer demand for our specialty waxes due to the COVID-19 pandemic. The end uses that are most affected are furniture, automotive and infrastructure (pipe and road marking). 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. Customer demand
Processing
Processing revenues were $2.5 million in the third quarter was strong and our sales remained limited by wax feed supply.
Processing
Processing revenues declined 14.4% or about $0.42020, a $0.1 million during the third quarter 2019increase from the third quarter 2018. The decrease was due to lower revenues from the hydrogenation/distillation unit as we work to improve the unit's reliability and lower demand from certain custom processing customers.2019.
Cost of Sales
Cost of Sales were lowerdecreased 3.6%, or approximately $0.3 million, in the third quarter 2019 from2020 compared to the third quarter 2018 due to2019. This decrease was primarily driven by lower wax sales.operating expenses.
Depreciation
Depreciation for the third quarter 20192020 was $1.49$1.4 million, relatively flata $0.1 million decrease from third quarter 2018.2019.
Capital Expenditures
Capital Expenditures were approximately $0.6 million in the third quarter 2020 compared with $0.4 million in the third quarter 2019 compared with $1.1 million in the third quarter of 2018.2019.
Corporate Segment
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, |
| | | 2020 | | 2019 | | Change | | % Change |
| | | (thousands of dollars) | | |
| General & Administrative Expense | | $ | 2,049 | | | $ | 2,670 | | | $ | (621) | | | (23.3) | % |
|
| | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, |
| | | 2019 |
| | 2018 |
| | Change |
| | % Change |
|
| | | (thousands of dollars) | | |
| General & Administrative Expense | | $ | 2,670 |
| | $ | 2,252 |
| | $ | 418 |
| | 18.6 | % |
General corporateCorporate expenses increased duringdecreased $0.6 million from the third quarter 2019 from the third quarter 2018. The increase is primarily attributabledue to an increase in executive compensation accrual.reduced accounting and consulting fees.
Investment in AMAK - Discontinued Operations
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, |
| | | 2020 | | 2019 | | Change | | % Change |
| | | (thousands of dollars) | | |
| Equity in earnings (losses) of AMAK | | $ | 682 | | | $ | (942) | | | $ | 1,624 | | | 172.4 | % |
|
| | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, |
| | | 2019 |
| | 2018 |
| | Change |
| | % Change |
|
| | | (thousands of dollars) | | |
| Equity in (losses) earnings of AMAK | | $ | (1,268 | ) | | $ | (1,130 | ) | | $ | (138 | ) | | 12.2 | % |
Equity in earnings (losses) of AMAK decreased duringinclude amortization of the difference between the Company's investment in AMAK and the Company's share of net assets of AMAK. For the third quarter 2019 from the third quarter 2018. The2020, equity in earnings (losses) of AMAK were impacted by increased selling, generalfrom third quarter 2019 due to higher metal prices and administrative expenses.lower production costs.
AMAK Summarized Income Statement
| | | | | | | | | | | | | | |
| | Three Months Ended
September 30, |
| | 2020 | | 2019 |
| | (thousands of dollars) |
| Sales | | $ | 23,943 | | | $ | 19,643 | |
| Cost of sales | | 18,644 | | | 19,072 | |
| Gross profit | | 5,299 | | | 571 | |
| Selling, general, and administrative | | 3,808 | | | 3,557 | |
| Operating income (loss) | | 1,491 | | | (2,986) | |
| Other income | | 16 | | | 43 | |
| Finance and interest expense | | (237) | | | (456) | |
| Income (loss) before Zakat and income taxes | | 1,270 | | | (3,399) | |
| Zakat and income tax (benefit) | | (240) | | | 444 | |
| Net Income (Loss) | | $ | 1,510 | | | $ | (3,843) | |
| | | | |
| Finance and interest expense | | 237 | | | 456 | |
| Depreciation and amortization | | 7,186 | | | 8,534 | |
| Zakat and income tax (benefit) | | (240) | | | 444 | |
| EBITDA | | $ | 8,693 | | | $ | 5,591 | |
|
| | | | | | | | |
| | | Three Months Ended
September 30, |
| | | 2019 | | 2018 |
| | | (thousands of dollars) |
| Sales | | $ | 19,643 |
| | $ | 19,877 |
|
| Cost of sales | | 19,072 |
| | 20,350 |
|
| Gross profit | | 571 |
| | (473 | ) |
| Selling, general, and administrative | | 3,557 |
| | 2,736 |
|
| Operating (loss) income | | (2,986 | ) | | (3,209 | ) |
| Other (expense) income | | 43 |
| | 35 |
|
| Finance and interest expense | | (456 | ) | | (416 | ) |
| Loss before Zakat and income taxes | | (3,399 | ) | | (3,590 | ) |
| Zakat and income taxes | | 444 |
| | 800 |
|
| Net Loss | | $ | (3,843 | ) | | $ | (4,390 | ) |
| | | | | |
| Finance and interest expense | | 456 |
| | 416 |
|
| Depreciation and amortization | | 8,534 |
| | 8,899 |
|
| Zakat and income taxes | | 444 |
| | 800 |
|
| EBITDA | | $ | 5,591 |
| | $ | 5,725 |
|
AMAK continued to make progress in throughput rates, concentrate quality and recoveries. Approximately 18,00019,000 dry metric tons (dmt) of copper and zinc concentrate were shipped in the third quarter 20192020 as compared to 17,00018,000 dmt of copper and zinc concentrate in the third quarter 2018. Third quarter EBITDA was approximately $5.6 million, relatively flat compared to2019.
We completed the sale of our ownership interest in AMAK during the third quarter 2018.of 2020. See Note 5 for additional discussion.
Results of Operations
Comparison of Nine Months Ended September 30, 2020 and 2019
Comparison of Nine Months Ended September 30, 2019 and 2018
Specialty Petrochemicals Segment
| | | | | | | | | | | | Nine Months Ended September 30, |
| | | Nine Months Ended September 30, | | | 2020 | | 2019 | | Change | | % Change |
| | | 2019 |
| | 2018 |
| | Change |
| | % Change |
| | | (thousands of dollars) |
| | | (thousands of dollars) | |
| Specialty Petrochemicals Product Sales | | 167,351 |
| | 178,094 |
| | $ | (10,743 | ) | | (6.0 | )% | |
| Product Sales | | Product Sales | | $ | 119,202 | | | $ | 167,351 | | | $ | (48,149) | | | (28.8) | % |
| Processing | | 4,117 |
| | 5,769 |
| | (1,652 | ) | | (28.6 | )% | Processing | | 4,047 | | | 4,117 | | | (70) | | | (1.7) | % |
| Gross Revenue | | $ | 171,468 |
| | $ | 183,863 |
| | $ | (12,395 | ) | | (6.7 | )% | Gross Revenue | | $ | 123,249 | | | $ | 171,468 | | | $ | (48,219) | | | (28.1) | % |
| | | | | | | | | | |
| Volume of Sales (gallons) | | | | | | | | | Volume of Sales (gallons) | |
| Specialty Petrochemicals Products | | 64,438 |
| | 64,586 |
| | (148 | ) | | (0.2 | )% | Specialty Petrochemicals Products | | 52,952 | | | 64,438 | | | (11,486) | | | (17.8) | % |
| Prime Product Sales | | 51,801 |
| | 50,729 |
| | 1,072 |
| | 2.1 | % | Prime Product Sales | | 44,042 | | | 51,801 | | | (7,759) | | | (15.0) | % |
| By-product Sales | | By-product Sales | | 8,910 | | | 12,637 | | | (3,727) | | | (29.5) | % |
| | | | | | | | | | |
| Cost of Sales | | 140,121 |
| | 160,543 |
| | (20,422 | ) | | (12.7 | )% | Cost of Sales | | $ | 102,654 | | | $ | 140,121 | | | (37,467) | | | (26.7) | % |
| Gross Margin | | 18.3 | % | | 12.7 | % | | | | 5.6 | % | Gross Margin | | 16.7 | % | | 18.3 | % | | (1.6) | % |
| Total Operating Expense* | | 53,983 |
| | 51,597 |
| | 2,386 |
| | 4.6 | % | Total Operating Expense* | | 50,022 | | | 53,983 | | | (3,961) | | | (7.3) | % |
| Natural Gas Expense* | | 3,636 |
| | 3,841 |
| | (205 | ) | | (5.3 | )% | Natural Gas Expense* | | 2,479 | | | 3,636 | | | (1,157) | | | (31.8) | % |
| Operating Labor Costs* | | 10,918 |
| | 13,351 |
| | (2,433 | ) | | (18.2 | )% | Operating Labor Costs* | | 11,984 | | | 10,918 | | | 1,066 | | | 9.8 | % |
| Transportation Costs* | | 21,405 |
| | 21,528 |
| | (123 | ) | | (0.6 | )% | Transportation Costs* | | 15,422 | | | 21,405 | | | (5,983) | | | (28.0) | % |
| General & Administrative Expense | | 7,950 |
| | 8,193 |
| | (243 | ) | | (3.0 | )% | General & Administrative Expense | | 7,944 | | | 7,950 | | | (6) | | | (0.1) | % |
| Depreciation and Amortization** | | 7,899 |
| | 6,020 |
| | 1,879 |
| | 31.2 | % | Depreciation and Amortization** | | 7,905 | | | 7,899 | | | 6 | | | 0.1 | % |
| Capital Expenditures | | 5,002 |
| | 16,374 |
| | (11,372 | ) | | (69.5 | )% | Capital Expenditures | | 9,067 | | | 5,002 | | | 4,065 | | | 81.3 | % |
Gross Revenue for our Specialty Petrochemicals segment decreased during the first nine months of 20192020 from the first nine months of 20182019 by 6.7%28.1% primarily due to lower sales volumes for prime products and byproducts as a result of the COVID-19 pandemic and its general impact on the economy. A decrease in average selling prices resulting from a decrease in feedstock costs also contributed to the average selling price of Specialty Petrochemicals products of 5.8% and lower processing revenue of $1.7 million.decline.
