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



FORM 10-Q



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

For the quarterly period ended March 31,September 30, 2017
or

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

For the transition period from _________ to __________

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

DELAWARE75-1256622
(State or other jurisdiction of(I.R.S. employer incorporation or
organization)identification no.)

1650 Hwy 6 South, Suite 19077478
Sugar Land, Texas(Zip code)
(Address of principal executive offices) 

Registrant's telephone number, including area code:  (409) 385-8300

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

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

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

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

Large accelerated filer ____ Accelerated filer _ X__

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

Emerging growth company_____

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

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

Number of shares of the Registrant's Common Stock (par value $0.10 per share), outstanding at MayNovember 4, 2017: 24,252,564.24,306,119.


TABLE OF CONTENTS

Item Number and Description
 
 
 
 
 1
 2
 3
 4
 5
   
1820
   
2531
   
2531
 
 
 
 
2632
   
2632
   
2632

PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS.

TRECORA RESOURCES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

 
MARCH 31,
2017
(unaudited)
  
DECEMBER 31,
2016
  
SEPTEMBER 30,
2017
(unaudited)
  
DECEMBER 31,
2016
 
ASSETS
 (thousands of dollars)  (thousands of dollars) 
Current Assets            
Cash and cash equivalents $4,045  $8,389 
Cash $4,219  $8,389 
Trade receivables, net  24,248   22,193   22,738   22,193 
Inventories  14,957   17,871   12,849   17,871 
Prepaid expenses and other assets  3,481   3,511   3,276   3,511 
Taxes receivable  4,143   3,983   3,764   3,983 
Total current assets  50,874   55,947   46,846   55,947 
                
Plant, pipeline and equipment, net
  151,606   140,009   172,048   140,009 
                
Goodwill  21,798   21,798   21,798   21,798 
Other intangible assets, net  22,204   22,669 
Intangible assets, net  21,273   22,669 
Investment in AMAK  48,420   49,386   44,225   49,386 
Mineral properties in the United States  588   588   588   588 
Other assets  63   87   21   87 
                
TOTAL ASSETS $295,553  $290,484  $306,799  $290,484 
LIABILITIES
                
Current Liabilities                
Accounts payable $13,062  $13,306  $12,381  $13,306 
Current portion of derivative instruments  34   58   7   58 
Accrued liabilities  3,247   2,017   6,304   2,017 
Current portion of post-retirement benefit  314   316   308   316 
Current portion of long-term debt  8,061   10,145   8,061   10,145 
Current portion of other liabilities  1,112   870   1,131   870 
Total current liabilities  25,830   26,712   28,192   26,712 
                
Long-term debt, net of current portion
  76,092   73,107   81,011   73,107 
Post-retirement benefit, net of current portion
  897   897   897   897 
Other liabilities, net of current portion
  1,977   2,309   1,681   2,309 
Deferred income taxes  24,261   23,083   24,654   23,083 
Total liabilities  129,057   126,108   136,435   126,108 
                
EQUITY
                
Common stock‑authorized 40 million shares of $.10 par value; issued 24.5 million in 2017 and 2016 and outstanding 24.3 million and 24.2 million shares in 2017 and 2016, respectively
  2,451   2,451   2,451   2,451 
Additional paid-in capital  54,077   53,474   55,344   53,474 
Common stock in treasury, at cost  (254)  (284)  (203)  (284)
Retained earnings  109,933   108,446   112,483   108,446 
Total Trecora Resources Stockholders' Equity  166,207   164,087   170,075   164,087 
Noncontrolling Interest  289   289   289   289 
Total equity  166,496   164,376   170,364   164,376 
                
TOTAL LIABILITIES AND EQUITY $295,553  $290,484  $306,799  $290,484 

 
See notes to consolidated financial statements.

TRECORA RESOURCES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)


 THREE MONTHS ENDED  
NINE MONTHS
ENDED
 
 THREE MONTHS ENDED  SEPTEMBER 30,  SEPTEMBER 30, 
 MARCH 31,  2017  2016  
2017
  2016 
 2017  2016  (thousands of dollars) 
REVENUES (thousands of dollars)             
      
Petrochemical and Product Sales $50,899  $47,181  $58,030  $52,115  $165,945  $143,662 
Processing Fees  4,643   5,019   3,478   5,027   13,220   14,534 
  55,542   52,200   61,508   57,142   179,165   158,196 
                        
OPERATING COSTS AND EXPENSES                        
Cost of Sales and Processing                        
(including depreciation and amortization of $2,383 and $2,219, respectively)  44,924   40,429 
(including depreciation and amortization of $2,565, $2,373, $7,311, and $6,620, respectively)  51,638   48,237   147,570   125,946 
                        
GROSS PROFIT  10,618   11,771   9,870   8,905   31,595   32,250 
                        
GENERAL AND ADMINISTRATIVE EXPENSES                        
General and Administrative  6,221   5,449   5,660   4,585   17,621   15,525 
Depreciation  205   177   245   192   655   556 
  6,426   5,626   5,905   4,777   18,276   16,081 
                        
OPERATING INCOME  4,192   6,145   3,965   4,128   13,319   16,169 
                        
OTHER INCOME (EXPENSE)                        
Interest Income  2   4 
Interest Expense  (636)  (628)  (795)  (568)  (2,109)  (1,803)
Bargain purchase gain from acquisition  --   --   --   11,549 
Equity in Earnings (Losses) of AMAK  (966)  5,367   (897)  (2,089)  (5,161)  2,261 
Miscellaneous Expense  (44)  (17)
Gain from Additional Equity Issuance by AMAK  --   3,168   --   3,168 
Miscellaneous Income (Expense)  22   (72)  (42)  38 
  (1,644)  4,726   (1,670)  439   (7,312)  15,213 
                        
INCOME BEFORE INCOME TAXES  2,548   10,871   2,295   4,567   6,007   31,382 
                        
INCOME TAXES  1,061   3,647   577   1,768   1,970   11,107 
                        
NET INCOME  1,487   7,224   1,718   2,799   4,037   20,275 
                        
NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST  --   --   --   --   --   -- 
                        
NET INCOME ATTRIBUTABLE TO TRECORA RESOURCES $1,487  $7,224  $1,718  $2,799  $4,037  $20,275 
                        
Basic Earnings per Common Share                        
Net Income Attributable to Trecora Resources (dollars) $0.06  $0.30  $0.07  $0.12  $0.17  $0.83 
                        
Basic Weighted Average Number of Common Shares Outstanding  24,240   24,484   24,304   24,223   24,267   24,304 
                        
Diluted Earnings per Common Share                        
Net Income Attributable to Trecora Resources (dollars) $0.06  $0.29  $0.07  $0.11  $0.16  $0.81 
                        
Diluted Weighted Average Number of Common Shares Outstanding  25,054   25,085   25,157   24,921   25,082   24,964 

See notes to consolidated financial statements.

TRECORA RESOURCES AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)

 TRECORA RESOURCES STOCKHOLDERS        TRECORA RESOURCES STOCKHOLDERS       
 COMMON STOCK  
ADDITIONAL
PAID-IN
  
TREASURY
  
RETAINED
     
NON-
CONTROLLING
  TOTAL  COMMON STOCK  
ADDITIONAL
PAID-IN
  
TREASURY
  
RETAINED
     
NON-
CONTROLLING
  TOTAL 
 SHARES  AMOUNT  CAPITAL  STOCK  EARNINGS  TOTAL  INTEREST  EQUITY  SHARES  AMOUNT  CAPITAL  STOCK  EARNINGS  TOTAL  INTEREST  EQUITY 
 (thousands)  (thousands of dollars)  (thousands)  (thousands of dollars) 
JANUARY 1, 2017  24,222  $2,451  $53,474  $(284) $108,446  $164,087  $289  $164,376   24,222  $2,451  $53,474  $(284) $108,446  $164,087  $289  $164,376 
                                                                
Stock options                                                                
Issued to Directors  -   -   30   -   -   30   -   30   -   -   90   -   -   90   -   90 
Issued to Employees  -   -   308   -   -   308   -   308   -   -   884   -   -   884   -   884 
Restricted Common Stock                                                                
Issued to Directors  -   -   82   -   -   82   -   82   -   -   230   -   -   230   -   230 
Issued to Employees  -   -   213   -   -   213   -   213   -   -   801   -   -   801   -   801 
Common stock                                                                
Issued to Directors  3   -   (3)  3   -   -   -   -   25   -   (79)  25   -   (54)  -   (54)
Issued to Employees  27   -   (27)  27   -   -   -   -   56   -   (56)  56   -   -   -   - 
Net Income  -   -   -   -   1,487   1,487   -   1,487   -   -   -   -   4,037   4,037   -   4,037 
                                                                
MARCH 31, 2017  24,252  $2,451  $54,077  $(254) $109,933  $166,207  $289  $166,496 
September 30, 2017  24,303  $2,451  $55,344  $(203) $112,483  $170,075  $289  $170,364 


See notes to consolidated financial statements.

TRECORA RESOURCES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

  NINE MONTHS ENDED 
  SEPTEMBER 30, 
  2017  2016 
  (thousands of dollars) 
OPERATING ACTIVITIES      
  Net Income $4,037  $20,275 
  Adjustments to Reconcile Net Income        
    To Net Cash Provided by Operating Activities:        
    Depreciation  6,570   5,761 
    Amortization of Intangible Assets  1,396   1,415 
    Unrealized Gain on Derivative Instruments  (51)  (89)
    Share-based Compensation  2,005   1,882 
    Deferred Income Taxes  1,571   6,851 
    Postretirement Obligation  (8)  186 
    Bargain purchase gain  -   (11,549)
    Equity in (earnings) losses of AMAK  5,161   (2,261)
    Gain from Additional Equity Issuance by AMAK  -   (3,168)
    Amortization of loan fees  154   213 
  Changes in Operating Assets and Liabilities:        
    Increase in Trade Receivables  (545)  (355)
    Decrease in Taxes Receivable  218   4,094 
    (Increase) Decrease in Inventories  5,022   (2,573)
    (Increase) Decrease in Prepaid Expenses and Other Assets  387   (1,494)
    Increase in Accounts Payable and Accrued Liabilities  3,356   1,304 
    Increase (Decrease) in Other Liabilities  281   (418)
         
    Net Cash Provided by Operating Activities  29,554   20,074 
         
INVESTING ACTIVITIES        
  Additions to Plant, Pipeline and Equipment  (39,250)  (25,860)
  Cash paid for acquisition of BASF facility  -   (2,011)
  Advances to AMAK, net  (86)  - 
    Cash Used in Investing Activities  (39,336)  (27,871)
         
FINANCING ACTIVITIES        
  Issuance of Common Stock  25   11 
  Payments related to tax withholding for stock-based compensation  (80)  - 
  Addition to Long-Term Debt  14,000   3,000 
  Repayment of Long-Term Debt  (8,333)  (6,250)
         
    Net Cash Provided by (Used in) Financing Activities  5,612   (3,239)
         
NET DECREASE IN CASH  (4,170)  (11,036)
         
CASH AT BEGINNING OF PERIOD  8,389   18,623 
         
CASH AND AT END OF PERIOD $4,219  $7,587 

  THREE MONTHS ENDED 
  MARCH 31, 
  2017  2016 
  (thousands of dollars) 
OPERATING ACTIVITIES      
  Net Income $1,487  $7,224 
  Adjustments to Reconcile Net Income of Trecora Resources        
    To Net Cash Provided by Operating Activities:        
    Depreciation  2,123   1,926 
    Amortization of Intangible Assets  465   469 
    Unrealized Gain on Derivative Instruments  (24)  (30)
    Share-based Compensation  633   647 
    Deferred Income Taxes  1,178   1,407 
    Postretirement Obligation  (2)  2 
    Equity in (earnings) losses of AMAK  966   (5,367)
    Amortization of loan fees  68   68 
  Changes in Operating Assets and Liabilities:        
    (Increase) Decrease in Trade Receivables  (2,056)  695 
    (Increase) Decrease in Taxes Receivable  (160)  2,177 
    (Increase) Decrease in Inventories  2,914   (1,521)
    Decrease in Prepaid Expenses and Other Assets  79   180 
    Increase (Decrease) in Accounts Payable and Accrued Liabilities  989   (1,430)
    Increase (Decrease) in Other Liabilities  70   (1,244)
         
    Net Cash Provided by Operating Activities  8,730   5,203 
         
INVESTING ACTIVITIES        
  Additions to Plant, Pipeline and Equipment  (13,881)  (7,602)
  Advances to AMAK, net  (26)  - 
         
    Cash Used in Investing Activities  (13,907)  (7,602)
         
FINANCING ACTIVITIES        
  Issuance of Common Stock  -   11 
  Addition to Long-Term Debt  5,000   - 
  Repayment of Long-Term Debt  (4,167)  (2,083)
         
    Net Cash Provided by (Used in) Financing Activities  833   (2,072)
         
NET DECREASE IN CASH AND CASH EQUIVALENTS  (4,344)  (4,471)
         
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD  8,389   18,623 
         
CASH AND CASH EQUIVALENTS AT END OF PERIOD $4,045  $14,152 
         
Supplemental disclosure of cash flow information:   
  Cash payments for interest $3,034  $1,804 
  Cash payments for taxes, net of refunds $227  $277 
Supplemental disclosure of non-cash items:        
  Capital expansion amortized to depreciation expense $642  $829 
   Estimated earnout liability
 $-  $733 

Supplemental disclosure of cash flow information:   
  Cash payments for interest $936  $583 
  Cash payments for taxes, net of refunds $-  $- 
Supplemental disclosure of non-cash items:        
  Capital expansion amortized to depreciation expense $161  $197 

See notes to consolidated financial statements.
TRECORA RESOURCES AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


1. GENERAL

Organization

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

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

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America ("GAAP") for interim financial information and in conformity with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, these unaudited financial statements do not include all of the information and footnotes required by GAAP for complete financial statements and, therefore, should be read in conjunction with the financial statements and related notes contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2016.

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

Operating results for the threenine months ended March 31,September 30, 2017, are not necessarily indicative of results for the year ending December 31, 2017.

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

In addition, the Company ownswe own a 33% interest in AMAK, a Saudi Arabian closed joint stock company which owns, operates and is developing mining assets in Saudi Arabia.  We account for our investment under the equity method of accounting.   See Note 16.17.

Certain reclassifications have been made to the Consolidated Balance Sheet for the year ended December 31, 2016, related to our adoption of Financial Accounting Standards Board ("FASB") Accounting Standards Update ("ASU") 2015-17 as noted below in Note 2.

The impact of the adoption ASU 2015-17 on the Company's previously issued December 31, 2016, balance sheet is as follows:






  
As Originally
Reported
  
As Retrospectively
Adjusted
 
  (in thousands) 
Deferred income tax asset, current $1,615  $- 
Total current assets  57,562   55,947 
Total assets  292,099   290,484 
Deferred income tax liability, noncurrent  24,698   23,083 
Total liabilities  127,723   126,108 
Total liabilities and equity  292,099   290,484 

2. RECENT ACCOUNTING PRONOUNCEMENTS

In May 2014 the FASBFinancial Accounting Standards Board ("FASB") issued ASUAccounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"). ASU 2014-09 supersedes the revenue recognition requirements of FASB Accounting Standards Codification ("ASC") Topic 605, Revenue Recognitionand most industry-specific guidance throughout the Accounting Standards Codification, resulting in the creation of FASB ASC Topic 606, Revenue from Contracts with Customers. ASU 2014-09 requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. This ASU provides alternative methods of retrospective adoption and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption would be permitted but not beforebefore annual periods beginning after December 15, 2016. The Company is in its preliminary stages of evaluating the impact of these amendments, although it doesn'tdoes not expect the amendments to have a significant impact to the Company's financial position or results of operation. The amendments could potentially impact the accounting procedures and processes over the recognition of certain revenue sources. The Company is expecting to beginhas begun developing processes and procedures during 2017 to ensure it is fully compliant with these amendments at the date of adoption.

In November 2015 the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred TaxesTaxes.. The new standard eliminates the current requirement for organizations to present deferred tax liabilities and assets as current and noncurrent in a classified balance sheet. Instead, organizations will be required to classify all deferred tax assets and liabilities as noncurrent. The amendments are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company implemented ASU 2015-17 by classifying all of it deferred tax assets (liabilities) as noncurrent on its MarchJanuary 1, 2017. See Note 1 for effect to the Balance Sheet for December 31, 2017, Balance Sheet.2016

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

In March 2016 the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which will reduce complexity in accounting standards related to share-based payment transactions, including, among others, (1) accounting for income taxes, (2) classification of excess tax benefits on the statement of cash flow, (3) forfeitures, and (4) statutory tax withholding requirements.  The ASU is effective for annual reporting periods beginning on or after December 15, 2016, and interim periods within those annual periods.  The Company implemented the amendments as of January 1, 2017. The stock based compensation plan has not historically generated material amounts of excess tax benefits or deficiencies and, therefore, there is no material change in the Company's financial position or results of operation, as a result of adopting this Update. For additional information on the stock-based compensation plan, see Note 12.13.


In January 2017 the FASB issued ASU No. 2017-04, Intangibles –Goodwill and Other (Topic 350).  The amendments in ASU 2017-04 simplify the measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Instead,
under these amendments, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss should not exceed the total amount of goodwill allocated to that reporting unit. The amendments are effective for public business entities for the first interim and annual reporting periods beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.The2017.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, 2016, the Company performed its impairment assessment and determined the fair value of the aggregated reporting units exceededexceed the carrying value, such that the Company's goodwill was not considered impaired. Although the Company cannot anticipate future goodwill impairment assessments, based on the most recent assessment, it is unlikely that an impairment amount would need to be calculated and, therefore, the Company does not anticipate a material impact from these amendments to the Company's financial position and results of operations. The current accounting policies and processes are not anticipated to change, except for the elimination of the Step 2 analysis.

3. TRADE RECEIVABLES

Trade receivables, net, consisted of the following:

 March 31, 2017  December 31, 2016  September 30, 2017  December 31, 2016 
 (thousands of dollars)  (thousands of dollars) 
Trade receivables $24,548  $22,493  $23,038  $22,493 
Less allowance for doubtful accounts  (300)  (300)  (300)  (300)
Trade receivables, net $24,248  $22,193  $22,738  $22,193 

Trade receivables serves as collateral for our amended and restated credit agreement. See Note 9.10.

4. PREPAID EXPENSES AND OTHER ASSETS

Prepaid expenses and other assets consisted of the following:

 March 31, 2017  December 31, 2016  September 30, 2017  December 31, 2016 
 (thousands of dollars)  (thousands of dollars) 
Prepaid license $1,919  $1,919  $1,919  $1,919 
Prepaid catalyst  124   187   55   187 
Prepaid insurance  566   797   255   797 
Other prepaid expenses and assets  872   608   1,047   608 
Total $3,481  $3,511  $3,276  $3,511 

5. INVENTORIES

Inventories included the following:

 March 31, 2017  December 31, 2016  September 30, 2017  December 31, 2016 
 (thousands of dollars)  (thousands of dollars) 
Raw material $3,225  $3,627  $2,390  $3,627 
Work in process  27   12   66   12 
Finished products  11,458   14,232   9,960   14,232 
Spare parts  247   -  ��433   - 
Total inventory $14,957  $17,871  $12,849  $17,871 

Effective January 1, 2017, we changed the inventory basis of SHR to FIFO.  We believe that the use of FIFO more accurately reflects current inventory valuation.  The drop in crude oil prices over the last several years has caused LIFO
value of inventory to be above the FIFO value for each of the past three years.period presented.  There was no LIFO reserve in any of the periods in this filing; therefore, no change is reflected in our current statements for the retrospective application.

Prior to this change, the difference between the calculated value of inventory under the FIFO and LIFO bases generated either a recorded LIFO reserve (i.e., where FIFO value exceeds the LIFO value) or an unrecorded negative LIFO reserve (i.e., where LIFO value exceeds the FIFO value).  In the latter case, in order to ensure that inventory was reported at the lower of cost or market and in accordance with ASC 330-10, we did not increase the stated value of our inventory to the LIFO value.  At December 31, 2016, LIFO value of petrochemical inventory exceeded FIFO; therefore, in accordance with the above policy, no LIFO reserve was recorded.

Inventory serves as collateral for our amended and restated credit agreement.  See Note 9.10.

Inventory included petrochemical products in transit valued at approximately $2.4$2.7 million and $2.1 million at March 31,September 30, 2017, and December 31, 2016, respectively.

Beginning January 1, 2017, due to the expansion of our plant assets at SHR and TC, we began inventorying spare parts for the repair and maintenance of our plant, equipment repairspipeline and maintenance.equipment.


6. PLANT, PIPELINE AND EQUIPMENT

Plant, pipeline and equipment consisted of the following:

 March 31, 2017  December 31, 2016  September 30, 2017  December 31, 2016 
 (thousands of dollars)  (thousands of dollars) 
Platinum catalyst metal $1,612  $1,612  $1,612  $1,612 
Land  5,376   5,376   5,428   5,376 
Plant, pipeline and equipment  156,142   154,107   183,472   154,107 
Construction in progress  45,093   33,391   42,930   33,391 
Total plant, pipeline and equipment  208,223   194,486   233,442   194,486 
Less accumulated depreciation  (56,617)  (54,477)  (61,394)  (54,477)
Net plant, pipeline and equipment $151,606  $140,009  $172,048  $140,009 


Plant, pipeline, and equipment serve as collateral for our amended and restated credit agreement. See Note 9.10.

Interest capitalized for construction was approximately $373,808$218,000 and $31,000$52,000 for the three and $878,000 and $124,000 for the nine months ended March 31,September 30, 2017, and September 30, 2016, respectively.

Construction in progress during the first threenine months of 2017 included equipment purchased for the hydrogenation/distillation project and updates to B Plant equipment at the TC facility, thefacility; new reformer unit, tankage upgrades, and additional tankagean addition to the rail spur at SHR.

Amortization relating to the platinum catalyst which is included in cost of sales was approximately $25,000$0 and $21,000$25,000 for the three months and $25,000 and $72,000 for the nine months ended March 31,September 30, 2017, and 2016, respectively.

7. GOODWILL AND INTANGIBLE ASSETS, NET

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

Intangible Assets

The following tables summarize the gross carrying amounts and accumulated amortization of intangible assets by major class (in thousands):
  March 31, 2017 
Intangible assets subject to amortization
(Definite-lived)
 Gross  
Accumulated
Amortization
  Net 
Customer relationships $16,852  $(2,808) $14,044 
Non-compete agreements  94   (48)  46 
Licenses and permits  1,471   (311)  1,160 
Developed technology  6,131   (1,532)  4,599 
   24,548   (4,699)  19,849 
Intangible assets not subject to amortization
(Indefinite-lived)
            
Emissions Allowance  197   -   197 
Trade name  2,158   -   2,158 
Total $26,903  $(4,699) $22,204 



  September 30, 2017 
Intangible assets subject to amortization
(Definite-lived)
 Gross  
Accumulated
Amortization
  Net 
Customer relationships $16,852  $(3,370) $13,482 
Non-compete agreements  94   (57)  37 
Licenses and permits  1,471   (364)  1,107 
Developed technology  6,131   (1,839)  4,292 
   24,548   (5,630)  18,918 
Intangible assets not subject to amortization
(Indefinite-lived)
            
Emissions Allowance  197   -   197 
Trade name  2,158   -   2,158 
Total $26,903  $(5,630) $21,273 

  December 31, 2016 
Intangible assets subject to amortization
(Definite-lived)
 Gross  
Accumulated
Amortization
  Net 
Customer relationships $16,852  $(2,527) $14,325 
Non-compete agreements  94   (43)  51 
Licenses and permits  1,471   (285)  1,186 
Developed technology  6,131   (1,379)  4,752 
   24,548   (4,234)  20,314 
Intangible assets not subject to amortization
(Indefinite-lived)
            
Emissions Allowance  197   -   197 
Trade name  2,158   -   2,158 
Total $26,903  $(4,234) $22,669 


Amortization expense for intangible assets included in cost of sales for the three months ended March 31,September 30, 2017, and 2016, was approximately $465,000$466,000 and $470,000,$471,000 and for the nine months ended September 30, 2017 and 2016, was approximately $1,396,000 and $1,415,000, respectively.

Based on identified intangible assets that are subject to amortization as of March 31,September 30, 2017, we expect future amortization expenses for each period to be as follows (in thousands):

 
Remainder of
2017
  
2018
  
2019
  
2020
  2021  
Thereafter
  
Remainder of
2017
  
2018
  
2019
  
2020
  2021  
Thereafter
 
Customer relationships $843  $1,123  $1,123  $1,123   1,123  $8,710  $282  $1,123  $1,123  $1,123   1,123  $8,710 
Non-compete agreements  14   19   12   -   -   -   5   19   12   -   -   - 
Licenses and permits  80   106   106   106   106   656   26   106   106   106   106   656 
Developed technology  460   613   613   613   613   1,687   153   613   613   613   613   1,687 
Total future amortization expense $1,397  $1,861  $1,854  $1,842  $1,842  $11,053  $466  $1,861  $1,854  $1,842  $1,842  $11,053 


8. NET INCOME PER COMMON SHARE ATTRIBUTABLE TO TRECORA RESOURCES


The following table (in thousands, except per share amounts) sets forth the computation of basic and diluted net income per share attributable to Trecora Resources for the three and nine months ended March 31,September 30, 2017, and 2016, respectively.

  
Three Months Ended
March 31, 2017
  
Three Months Ended
March 31, 2016
 
        Per Share        Per Share 
  Income  Shares  Amount  Income  Shares  Amount 
Basic Net Income per Share:                  
Net Income Attributable to Trecora Resources $1,487   24,240  $0.06  $7,224   24,484  $0.30 
                         
Unvested restricted stock grant      321           282     
Dilutive stock options outstanding      493           319     
                         
Diluted Net Income per Share:                        
Net Income Attributable to Trecora Resources $1,487   25,054  $0.06  $7,224   25,085  $0.29 
  
Three Months Ended
September 30, 2017
  
Three Months Ended
September 30, 2016
 
        Per Share        Per Share 
  Income  Shares  Amount  Income  Shares  Amount 
Basic Net Income per Share:                  
Net Income Attributable to Trecora Resources $1,718   24,304  $0.07  $2,799   24,223  $0.12 
                         
Unvested restricted stock grant      379           304     
Dilutive stock options outstanding      474           394     
                         
Diluted Net Income per Share:                        
Net Income Attributable to Trecora Resources $1,718   25,157  $0.07  $2,799   24,921  $0.11 

  
Nine Months Ended
September 30, 2017
  
Nine Months Ended
September 30, 2016
 
        Per Share        Per Share 
  Income  Shares  Amount  Income  Shares  Amount 
Basic Net Income per Share:                  
Net Income Attributable to Trecora Resources $4,037   24,267  $0.17  $20,275   24,304  $0.83 
                         
Unvested restricted stock grant      360           297     
Dilutive stock options outstanding      455           363     
                         
Diluted Net Income per Share:                        
Net Income Attributable to Trecora Resources $4,037   25,082  $0.16  $20,275   24,964  $0.81 

At March 31,September 30, 2017, and 2016, 1,344,0871,334,087 and 1,368,4371,348,437 potential common stock shares, respectively were issuable upon the exercise of options and warrants.

The earnings per share calculation for the period ended March 31, 2016, included 300,000 shares9. ACCRUED LIABILITIES

Accrued liabilities consisted of the Company that were held in the treasury of TOCCO.  These shares were transferred to the treasury of TREC in late 2016.following:

  September 30, 2017  December 31, 2016 
  (thousands of dollars) 
Accrued property taxes $2,188  $- 
Accrued payroll  1,563   1,097 
Accrued officer compensation  900   - 
Accrued shortfall fees  586   - 
Other  1,067   920 
    Total $6,304  $2,017 
9.
10. LIABILITIES AND LONG-TERM DEBT

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

910

 
Four
For Fiscal Quarter EndingMaximum Consolidated Leverage Ratio
March 31, 20174.00 to 1.00
June 30, 20174.25 to 1.00
September 30, 20173.75 to 1.00
December 31, 20173.50 to 1.00
March 31, 2018 and each fiscal quarter thereafter3.25 to 1.00

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

FourFor Fiscal Quarter Ending
Minimum Consolidated Fixed Charge Coverage Ratio
March 31, 20171.10 to 1.00
June 30, 20171.05 to 1.00
September 30, 20171.05 to 1.00
December 31, 20171.10 to 1.00
March 31, 2018 and each fiscal quarter thereafter1.25 to 1.00

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

 
Level
 
Consolidated Leverage Ratio
 
LIBOR Margin
 
Base Rate Margin
 
Commitment Fee
1Less than 1.50 to 1.002.00%1.00%0.25%
2Greater than or equal to 1.50 to 1.00 but less than 2.00 to 1.002.25%1.25%0.25%
3Greater than or equal to 2.00 to 1.00 but less than 3.00 to 1.002.50%1.50%0.375%
4Greater than or equal to 3.00 to 1.00 but less than 3.50 to 1.002.75%1.75%0.375%
5Greater than or equal to 3.50 to 1.003.00%2.00%0.375%

We were in compliance with all covenants at March 31,September 30, 2017.

On July 25, 2017, Texas Oil & Chemical Co. II, Inc. ("TOCCO"), South Hampton Resources, Inc. ("SHR"), Gulf State Pipe Line Company, Inc. ("GSPL"), and Trecora Chemical, Inc. ("TC") (SHR, GSPL and TC collectively the "Guarantors") entered into a Third Amendment to Amended and Restated Credit Agreement ("3rd Amendment") with the lenders which from time to time are parties to the Amended and Restated Credit  Agreement (collectively, the "Lenders") and Bank of America, N.A., a national banking association, as Administrative Agent for the Lenders.  The 3rd Amendment increased the Revolving Facility from $40,000,000 to $60,000,000.  There were no other changes to the Revolving Facility.  Under the ARC as amended, we have a $40.0$60.0 million revolving line of credit which matures on October 1, 2019.  As of March 31,September 30, 2017, and December 31, 2016, there was a long-term amount of $14.0$23.0 million and $9.0 million outstanding, respectively.  The interest rate on the loan varies according to several options.  Interest on the loan is paid monthly and a commitment fee of between 0.25% and 0.375% is due quarterly on the unused portion of the loan.  At March 31,September 30, 2017, approximately $26.0$37.0 million was available to be drawn.  Under the Second Amendment we could draw the full amount$31.0 million and maintain compliance with our covenants.

Under the ARC, we also borrowed $70.0 million in a single advance term loan (the "Acquisition Loan") to partially finance the acquisition of TC.  Interest on the Acquisition Loan is payable quarterly using a ten year commercial style amortization.  Principal is also payable on the last business day of each March, June, September and December in an amount equal to $1,750,000, provided that the final installment on the September 30, 2019, maturity date shall be in an amount equal to the then outstanding unpaid principal balance of the Acquisition Loan.  At March 31,September 30, 2017, there was a short-term amount of $7.0 million and a long-term amount of $45.5$42.0 million outstanding.  At December 31, 2016, there was a short-term amount of $8.8 million and a long-term amount of $47.3 million outstanding.

Under the ARC, we also had the right to borrow $25.0 million in a multiple advance loan ("Term Loans").  Borrowing availability under the Term Loans ended on December 31, 2015.  The Term Loans converted from a multiple advance loan to a "mini-perm" loan once certain obligations were fulfilled such as certification that construction of D-Train was completed in a good and workmanlike manner, receipt of applicable permits and releases from governmental authorities, and receipt of releases of liens from the contractor and each subcontractor and supplier.  Interest on the Term Loans is paid monthly.  At
March 31, September 30, 2017, there was a short-term amount of $1.3 million and a long-term amount of $17.0$16.3 million outstanding.  At December 31, 2016, there was a short-term amount of $1.7 million and a long-term amount of $17.3 million outstanding.

Debt issuance costs of approximately $0.6 million and $0.7 million for the periods ended March 31,September 30, 2017, and December 31, 2016, have been netted against outstanding loan balances.   The interest rate on all of the above loans varies according to several options as defined in the ARC.  At March 31,September 30, 2017, and December 31, 2016, the rate was 3.48%3.74% and 3.27%, respectively.

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

  September 30, 2017  December 31, 2016 
       
Acquisition loan $49,000  $56,000 
Term loan  17,666   19,000 
Revolving facility  23,000   9,000 
Total  89,666   84,000 
Less debt issuance costs  594   748 
Carrying balance of debt $89,072  $83,252 


11. FAIR VALUE MEASUREMENTS

The following items are measured at fair value on a recurring basis subject to disclosure requirements of ASC Topic 820 at March 31,September 30, 2017, and December 31, 2016:

Assets and Liabilities Measured at Fair Value on a Recurring Basis

    Fair Value Measurements Using     Fair Value Measurements Using 
 March 31, 2017  Level 1  Level 2  Level 3  September 30, 2017  Level 1  Level 2  Level 3 
 (thousands of dollars)  (thousands of dollars) 
Liabilities:                        
Interest rate swap $34   -  $34   -  $7   -  $7   - 

     Fair Value Measurements Using 
  December 31, 2016  Level 1  Level 2  Level 3 
  (thousands of dollars) 
Liabilities:            
Interest rate swap $58   -  $58   - 

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

Commodity Financial Instruments

We periodically enter into financial instruments to hedge the cost of natural gasoline (the primary feedstock) and natural gas (used as fuel to operate the plant).  

We assess the fair value of the financial swaps on feedstock using quoted prices in active markets for identical assets or liabilities (Level 1 of fair value hierarchy).  At March 31, 2017, and December 31, 2016, no commodity financial instruments were outstanding.  For additional information see Note 11.

Interest Rate Swap

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

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

We have consistently applied valuation techniques in all periods presented and believe we have obtained the most accurate information available for the types of derivative contracts we hold. See discussion of our derivative instruments in Note 11.12.





11.12. DERIVATIVE INSTRUMENTS

Commodity Financial Contracts

Hydrocarbon based manufacturers, such as the Company, are significantly impacted by changes in feedstock and natural gas prices. Not considering derivative transactions, feedstock and natural gas used for the three months ended March 31, 2017, and 2016, represented approximately 67.3% and 64.0% of our petrochemical cost of sales, respectively.

We endeavor to acquire feedstock and natural gas at the lowest possible cost.  Our primary feedstock (natural gasoline) is traded over the counter and not on organized futures exchanges.  Financially settled instruments (fixed price swaps) are the principal vehicle used to give some predictability to feed prices. We do not purchase or hold any derivative financial instruments for trading or speculative purposes and hedging is limited by our risk management policy to a maximum of 40% of monthly feedstock requirements.

Typically, financial contracts are not designated as hedges.  As of March 31, 2017, we had no outstanding committed financial contracts.

Realized and unrealized gains/losses are recorded in Cost of Sales and Processing.  Since we have not held any contracts during the periods covered in this filing, there has been no effect on the three months ended March 31, 2017, or 2016.

Interest Rate Swap

In March 2008, we entered into a pay-fixed, receive-variable interest rate swap agreement with Bank of America related to a $10.0 million (later increased to $14 million) term loan secured by plant, pipeline and equipment. The effective date of the interest rate swap agreement was August 15, 2008, and terminates on December 15, 2017.  The notional amount of the interest rate swap was $1.5$1.0 million and $1.75 million at March 31,September 30, 2017, and December 31, 2016, respectively.  We receive credit for payments of variable rate interest made on the term loan at the loan's variable rates, which are based upon the London InterBank Offered Rate (LIBOR), and pay Bank of America an interest rate of 5.83% less the credit on the interest rate swap.  We originally designated the transaction as a cash flow hedge according to ASC Topic 815, Derivatives and Hedging.  Beginning on August 15, 2008, the derivative instrument was reported at fair value with any changes in fair value reported within other comprehensive income (loss) in the Company's Statement of Stockholders' Equity.  We entered into the interest rate swap to minimize the effect of changes in the LIBOR rate.

The following table shows (in thousands) the impact the agreement had on the financial statements:

  March 31, 2017  December 31, 2016 
       
Fair value of interest rate swap  - liability $34  $58 

Due to the ARC discussed in Note 9,10, we believe that the hedge is no longer entirely effective; therefore, we began treating the interest rate swap as ineffective at that point.  The changes in fair value are now recorded in the Statement of Income.  For the three months ended March 31,September 30, 2017, an unrealized loss of approximately $1,000 and a realized loss of approximately $14,000 were recorded.  For the nine months ended September 30, 2017, an unrealized gain of approximately $3,000$1,000 and a realized loss of approximately $21,000$53,000 were recorded. For the three months ended March 31,September 30, 2016, an unrealized gain of approximately $5,000 and a realized loss of approximately $30,000 were recorded.  For the nine months ended September 30, 2016, an unrealized loss of approximately $6,000$9,000 and a realized loss of approximately $37,000$100,000 were recorded.

12.The following table shows (in thousands) the impact the agreement had on the financial statements:

  September 30, 2017  December 31, 2016 
       
Fair value of interest rate swap  - liability $7  $58 

13. STOCK-BASED COMPENSATION

Stock-based compensation recognized inof approximately $716,000 and $608,000 during the three months and $2,005,000 and $1,882,000 during the nine months ended March 31,September 30, 2017, and 2016, respectively, was approximately $633,000 and $647,000, respectively.recognized.

Restricted Stock Unit Awards

On June 16, 2017, we awarded approximately 127,000 shares of restricted stock units to officers at a grant date price of $11.40.  One-half of the restricted stock units vest ratably over three years.  The other half vests at the end of three years based upon the performance metrics of return on invested capital and earnings per share growth.  The number of shares actually granted will be adjusted based upon relative performance to our peers.  Compensation expense recognized during the three and nine months ended September 30, 2017, was approximately $121,000 and $161,000, respectively.

Director compensation of approximately $56,000 and $0 was recognized$19,000 during the three months and $169,000 and $32,000 during the nine months ended March 31,September 30, 2017, and 2016, respectively, was recognized related to restricted stock unit awards granted to directors vesting through 2020.

Officer compensation of approximately $105,000$106,000 and $35,000$105,000 was recognized during the three months and $316,000 and $246,000 during the nine months ended March 31,September 30, 2017, and 2016, respectively, related to restricted stock unit awards granted to officers.  One-half of the restricted stock vestsunits vest ratably over 3three years.  The other half vests at the end of the three years based upon the performance metrics of return on invested capital and earnings per share growth.  The number of shares actually granted will be adjusted based upon relative performance to our peers.

Director compensation of approximately $6,000$0 and $87,000$19,000 was recognized during the three months and $6,000 and $124,000 during the nine months ended March 31,September 30, 2017, and 2016, respectively, related to an award of restricted stock units to a director.  The restricted stock unit award vests over 4 years in 20% increments.

Director compensation of approximately $19,000 and $19,000 during the three months and $56,000 and $40,000 during the nine months ended March 31,September 30, 2017, and 2016, respectively, was recognized related to restricted stock unit grants vesting through 2020.

Employee compensation of approximately $108,000 and $108,000 during the three months and $323,000 and $323,000 for the nine months ended March 31,September 30, 2017, and 2016, respectively, was recognized related to restricted stock units with a 4 year vesting period which was awarded to officers.  This restricted stock vests through 2019.

Restricted stock units activity in the first threenine months of 2017 was as follows:

 
Shares of Restricted
Stock
  
Weighted Average Grant Date Price per Share
  
Shares of Restricted
Stock Units
  
Weighted Average Grant Date Price per Share
 
            
Outstanding at January 1, 2017  350,891  $11.44   350,891  $11.44 
Granted  -   -   127,281  $11.40 
Forfeited  (21,201) $10.52   (21,201) $10.52 
Vested  (59,064) $12.12   (78,362) $12.00 
Outstanding at March 31, 2017  270,626  $11.37 
Outstanding at September 30, 2017  378,608  $11.37 

Stock Option and Warrant Awards

A summary of the status of our stock option awards and warrants is presented below:

 
Number of Stock Options & Warrants
  
Weighted Average Exercise Price per Share
  
Weighted
Average
Remaining
Contractual
Life
  
Number of Stock Options & Warrants
  
Weighted Average Exercise Price per Share
  
Weighted
Average
Remaining
Contractual
Life
 
                  
Outstanding at January 1, 2017  1,348,437  $7.79      1,348,437  $7.79    
Granted  --   --      --   --    
Exercised  (4,350)  3.90      (14,350)  2.90    
Expired  --   --      --   --    
Cancelled  --   --      --   --    
Forfeited  --   --      --   --    
Outstanding at March 31, 2017  1,344,087  $7.80   4.9 
Exercisable at March 31, 2017  976,587  $8.15   5.2 
Outstanding at September 30, 2017  1,334,087  $7.84   4.5 
Exercisable at September 30, 2017  989,087  $8.19   4.8 

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

DirectorDirectors' compensation of approximately $30,000 and $66,000$30,000 during the three months and $90,000 and $143,000 during the nine months ended March 31,September 30, 2017, and 2016,  respectively, was recognized related to options to purchase shares vesting through 2017.

Employee compensation of approximately $309,000$277,000 and $308,000 during the three months and $884,000 and $926,000 during the nine months ended March 31,September 30, 2017, and 2016, respectively, was recognized related to options with a 4 year vesting period which were awarded to officers and key employees.  These options vest through 2018.

Post-retirement compensation of approximately $0 and $24,000$0 was recognized during the three months and $0 and $49,000 during the nine months ended March 31,September 30, 2017, and 2016, related to options awarded to Mr. Hatem El Khalidi in July
2009.  On May 9, 2010, the Board of Directors determined that Mr. El Khalidi forfeited these options and other retirement benefits when he made various demands against the Company and other AMAK Saudi shareholders which would benefit him personally and were not in the best interests of
the Company and its shareholders.  The Company is litigating its right to withdraw the options and benefits and as such, these options and benefits continue to be shown as outstanding.  See further discussion in Note 18.19.

See the Company's Annual Report on Form 10-K for the year ended December 31, 2016, for additional information.

13.14. SEGMENT INFORMATION

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

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

  Three Months Ended March 31, 2017 
  Petrochemical  Specialty Wax  Corporate  Consolidated 
  (in thousands) 
Product sales $44,391  $6,508  $-  $50,899 
Processing fees  1,488   3,155   -   4,643 
Net revenues  45,879   9,663   -   55,542 
Operating profit (loss) before depreciation and amortization  8,214   745   (2,179)  6,780 
Operating profit (loss)  6,658   (271)  (2,195)  4,192 
Profit (loss) before taxes  6,005   (290)  (3,167)  2,548 
Depreciation and amortization  1,556   1,016   16   2,588 
Capital expenditures  8,756   5,125   -   13,881 

 Three Months Ended March 31, 2016  Three Months Ended September 30, 2017 
 Petrochemical  Specialty Wax  Corporate  Consolidated  Petrochemical  Specialty Wax  Corporate  Consolidated 
 (in thousands)  (in thousands) 
Product sales $42,624  $4,557  $-  $47,181  $52,440  $5,590  $-  $58,030 
Processing fees  1,441   3,578   -   5,019   1,519   1,959   -   3,478 
Net revenues  44,065   8,135   -   52,200 
Total revenues  53,959   7,549   -   61,508 
Operating profit (loss) before depreciation and amortization  8,412   2,062   (1,933)  8,541   9,319   (587)  (1,957)  6,775 
Operating profit (loss)  7,075   1,011   (1,941)  6,145   7,735   (1,795)  (1,975)  3,965 
Profit (loss) before taxes  6,449   1,006   3,416   10,871   7,149   (1,975)  (2,879)  2,295 
Depreciation and amortization  1,337   1,051   8   2,396   1,584   1,208   18   2,810 
Capital expenditures  5,662   1,940   -   7,602   9,426   1,991   -   11,417 

  March 31, 2017 
  Petrochemical  Specialty Wax  Corporate  Eliminations  Consolidated 
  (in thousands) 
Goodwill and intangible assets, net $-  $44,002  $-  $-  $44,002 
Total assets  228,280   116,765   99,018   (148,510)  295,553 

  Nine Months Ended September 30, 2017 
  Petrochemical  Specialty Wax  Corporate  Consolidated 
  (in thousands) 
Product sales $147,339  $18,606  $-  $165,945 
Processing fees  5,078   8,142   -   13,220 
Total revenues  152,417   26,748   -   179,165 
Operating profit (loss) before depreciation and amortization  26,294   969   (5,978)  21,285 
Operating profit (loss)  21,610   (2,264)  (6,027)  13,319 
Profit (loss) before taxes  19,750   (2,534)  (11,209)  6,007 
Depreciation and amortization  4,684   3,233   49   7,966 
Capital expenditures  27,203   12,047   -   39,250 


  Three Months Ended September 30, 2016 
  Petrochemical  Specialty Wax  Corporate  Consolidated 
  (in thousands) 
Product sales $47,250  $4,865  $-  $52,115 
Processing fees  2,909   2,118   -   5,027 
Total revenues  50,159   6,983   -   57,142 
Operating profit (loss) before depreciation and amortization  7,813   118   (1,238)  6,693 
Operating profit (loss)  6,366   (987)  (1,251)  4,128 
Profit (loss) before taxes  5,812   (1,063)  (182)  4,567 
Depreciation and amortization  1,447   1,105   13   2,565 
Capital expenditures  5,411   4,066   -   9,477 


  Nine Months Ended September 30, 2016 
  Petrochemical  Specialty Wax  Corporate  Consolidated 
  (in thousands) 
Product sales $129,076  $14,585  $-  $143,661 
Processing fees  6,769   7,766   -   14,535 
Total revenues  135,845   22,351   -   158,196 
Operating profit (loss) before depreciation and amortization  25,699   2,774   (5,128)  23,345 
Operating profit (loss)  21,488   (171)  (5,148)  16,169 
Profit before taxes*  19,696   11,427   259   31,382 
Depreciation and amortization  4,211   2,945   20   7,176 
Capital expenditures  16,812   11,059   -   27,871 
    *Profit (loss) before taxes for the specialty wax segment includes a bargain purchase gain of $11.5 million.


  September 30, 2017 
  Petrochemical  Specialty Wax  Corporate  Eliminations  Consolidated 
  (in thousands) 
Goodwill and intangible assets, net $-  $43,071  $-  $-  $43,071 
Total assets  246,679   116,494   94,747   (151,121)  306,799 

  Year Ended December 31, 2016 
  Petrochemical  Specialty Wax  Corporate  Eliminations  Consolidated 
  (in thousands) 
Goodwill and intangible assets, net $-  $44,467  $-  $-  $44,467 
Total assets  219,376   113,676   106,428   (148,996)  290,484 

14.15. INCOME TAXES

We file an income tax return in the U.S. federal jurisdiction and a margin tax return in Texas. We received notification from the Internal Revenue Service ("IRS") in November 2016 on the selection ofthat the December 31, 2014, tax return was selected for audit.  In April 2017 the audit was expanded to include the year ended December 31, 2015 to review the refund claim related to research and development activities.  The audit is ongoing, and we do not expect any adjustment to the return.  If any issues addressed in the audit are resolved in a manner not consistent with our expectation, provisions will be adjusted in the period the resolution occurs.  Tax returns for various jurisdictions remain open for examination for the years 2013 through 2016.  As of March 31,September 30, 2017, and December
31, 2016, we recognized no material adjustments in connection with uncertain tax positions.  The effective tax rate varies from the federal statutory rate of 35% primarily as a result of state tax expense and stock option based compensation offset by the manufacturing deduction.deduction and research and development.  The application for the change in accounting method for inventory from LIFO to FIFO is alsoand the change for spare parts inventory are being submitted to the IRS.

15.16. POST-RETIREMENT OBLIGATIONS

In January 2008 an amended retirement agreement was entered into with Mr. Hatem El Khalidi; however, on May 9, 2010, the Board of Directors terminated the agreement due to actions of Mr. El Khalidi.  See Notes 1213 and 18.19.  All amounts which have not met termination dates remain recorded until a resolution is achieved. As of March 31,September 30, 2017, and December 31, 2016, approximately $1.0 million remained outstanding and was included in post-retirement benefits.

In July 2015 we entered into a retirement agreement with former CEO, Nicholas Carter.  As of March 31,September 30, 2017, and December 31, 2016, approximately $0.3 million remained outstanding and was included in post-retirement obligations.

See the Company's Annual Report on Form 10-K for the year ended December 31, 2016, for additional information.

16.17. INVESTMENT IN AMAK

In July 2016 AMAK issued four million shares to provide additional funds for ongoing exploration work and mine start-up activities.  Arab Mining Co. ("Armico") purchased 3.75 million shares at 20 Saudi Riyals per share (USD$5.33 per share)
and the remaining 250,000 shares are for future use as employee incentives.  We did not participate in the offering, thereby reducing our ownership percentage in AMAK to 33.44% from 35.25%.

As of March 31,September 30, 2017, and December 31, 2016, the Company had a non-controlling equity interest of 33.44% in AMAK of approximately $48.2$44.2 million and $49.4 million, respectively. This investment is accounted for under the equity method. There were no events or changes in circumstances that may have an adverse effect on the fair value of our investment in AMAK at March 31,September 30, 2017.

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
March 31,
  
Three Months Ended September 30,
  
Nine Months Ended September 30,
 
 2017  2016  
2017
  
2016
  
2017
  
2016
 
 ( thousands of dollars)  (Thousands of Dollars) 
Sales $2,256  $8,992  $9,709  $318  $11,965  $9,921 
Gross profit (loss)  (1,307)  191 
                
Gross loss  (1,307)  (4,747)  (11,515)  (7,556)
General, administrative and other expenses  2,589   2,147   2,382   2,463   6,942   6,986 
Loss from operations $(3,896) $(1,956) $(3,689) $(7,210) $(18,457) $(14,542)
Gain on settlement with former operator  -   16,225 
Gain on settlements with former operator  -   -   -   17,440 
Net income (loss) $(3,896) $14,269  $(3,689) $(7,210) $(18,457) $2,898 

Gain on settlementsettlements with former operator of approximately $16.2 million$0 during the three months ended March 31,and $17.4 million during the nine months ended September 30, 2016, relates to a settlement with the former operator of the mine resulting in a reduction of previously accrued operating expenses.

Depreciation and amortization was $0.5$6.2 million and $2.7$3.2 million for the three months and $16.9 million and $8.6 million for the nine months ended March 31,September 30, 2017, and 2016, respectively.  Therefore, net income (loss) before depreciation and amortization was as follows:

  
Three Months Ended
March 31,
 
  2017  2016 
  ( thousands of dollars) 
Net income (loss) before depreciation and amortization $(3,369) $16,978 
  
Three Months Ended September 30,
  
Nine Months Ended September 30,
 
  
2017
  
2016
  
2017
  
2016
 
  (Thousands of Dollars) 
Net income (loss) before depreciation and amortization $2,525  $(4,021) $(1,577) $11,504 

Financial Position

 March 31,  December 31,  
September 30,
  
December 31,
 
 2017  2016  
2017
  
2016
 
 (Thousands of Dollars)  (Thousands of Dollars) 
Current assets $17,333  $22,860  $22,839  $22,860 
Noncurrent assets  257,715   251,741   247,335   251,741 
Total assets $275,048  $274,601  $270,174  $274,601 
                
Current liabilities $10,326  $8,005  $26,315  $8,005 
Long term liabilities  84,567   82,546   78,265   82,546 
Shareholders' equity  180,155   184,050   165,594   184,050 
 $275,048  $274,601  $270,174  $274,601 

The equity in the income or loss of AMAK reflected on the consolidated statements of income for the three and nine months ended March 31,September 30, 2017, and 2016, is comprised of the following:

  
Three months ended
March 31,
 
  2017  2016 
AMAK Net income (loss) $(3,896) $14,269 
         
Company's share of income (loss) reported by AMAK $(1,303) $5,030 
Amortization of difference between Company's investment in AMAK and Company's share of net assets of AMAK  337   337 
Equity in earnings (loss) of AMAK $(966) $5,367 

  
Three months ended
September 30,
  
Nine months ended
September 30,
 
  2017  2016  2017  2016 
  (Thousands of Dollars) 
AMAK Net Income (Loss) $(3,689) $(7,210) $(18,457) $2,898 
Zakat tax applicable to Saudi Arabian shareholders only  -   -   -   320 
AMAK Net Income (Loss) before Saudi Arabian shareholders' portion of Zakat $(3,689) $(7,210) $(18,457) $3,218 
                 
Company's share of income (loss) reported by AMAK $(1,234) $(2,426) $(6,172) $1,250 
Amortization of difference between Company's investment in AMAK and Company's share of net assets of AMAK  337   337   1,011   1,011 
Equity in earnings (loss) of AMAK $(897) $(2,089) $(5,161) $2,261 

See our Annual Report on Form 10-K for the year ended December 31, 2016, for additional information.

17.We have an advance due from AMAK for reimbursement of fees associated with AMAK Board meetings.  We have not advanced any cash to AMAK during 2017.

18. RELATED PARTY TRANSACTIONS

Consulting fees of approximately $27,000$0 and $33,000$0 were incurred during the three months and $27,000 and $33,000 during the nine months ended March 31,September 30, 2017, and 2016, respectively from IHS Global FZ LLC of which Company Director Gary K Adams held the position of Chief Advisor – Chemicals until April 1, 2017.

Consulting fees of approximately $19,000 and $22,000$17,000 were incurred during the three months and $56,000 and $52,000 during the nine months ended March 31,September 30, 2017, and 2016, respectively, from Chairman of the Board, 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.

18.19. COMMITMENTS AND CONTINGENCIES

Guarantees

On October 24, 2010, we executed a limited Guarantee in favor of the Saudi Industrial Development Fund ("SIDF") whereby we agreed to guaranty up to 41% of the SIDF loan to AMAK in the principal amount of 330.0 million Saudi Riyals (US$88.0 million) (the "Loan"). The term of the loan is through June 2019.  As a condition of the Loan, SIDF required all shareholders of AMAK to execute personal or corporate Guarantees; as a result, our guarantee is for approximately 135.33 million Saudi Riyals (US$36.1 million). The loan was necessary to continue construction of the AMAK facilities and provide working capital needs.  We received no consideration in connection with extending the guarantee and did so to maintain and enhance the value of its investment.  The total amount outstanding to the SIDF at March 31,September 30, 2017, was 310.0305.0 million Saudi Riyals (US$82.781.3 million).

Litigation -

From time to time, we may become party to litigation or other legal proceedings that we consider to be a part of the ordinary course of our business. We are not currently involved in any legal proceedings that we believe 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.

On March 21, 2011, Mr. El Khalidi filed suit against the Company in Texas alleging breach of contract and other claims.  The 88th Judicial District Court of Hardin County, Texas dismissed all claims and counterclaims for want of prosecution in this matter on July 24, 2013.  The Ninth Court of Appeals subsequently affirmed the dismissal for want of prosecution and
the Supreme Court of Texas denied Mr. El Khalidi's petition for review.  On May 1, 2014, Mr. El Khalidi refiled his lawsuit against the Company for breach of contract and defamation in the 356th Judicial District Court of Hardin County, Texas.  The case was transferred to the 88th Judicial District Court of Hardin County, Texas.  On September 1, 2016, the Court dismissed all of Mr. El Khalidi's claims and causes of action with prejudice.  Mr. El Khalidi has filed a notice of appeal.appealed, and the issues have been fully briefed.  Liabilities of approximately $1.0 million remain recorded, and the options will continue to accrue in accordance with their own terms until all matters are resolved.

On or about August 3, 2015, SHR received notice of a lawsuit filed in the 14th Judicial District Court of Calcasieu Parish, Louisiana.  The suit alleges that the plaintiff became ill from exposure to benzene.  SHR placed its insurers on notice.  Its insurers retained a law firm based in Louisiana to defend SHR.

On or about March 18, 2016, SHR received notice

18
On or about August 2, 2016, SHR received notice of a lawsuit filed in the 58th Judicial District Court of Jefferson County, Texas.  The suit alleges that the plaintiff became ill from exposure to benzene.  SHR placed its insurers on notice.  Its insurers retained a law firm based in Texas to defend SHR.

On or about November 5, 2016, SHR received notice of a lawsuit filed in the 172nd Judicial District Court of Jefferson County, Texas.  The suit alleges that the plaintiff became ill from exposure to benzene.  SHR placed its insurers on notice.  Its insurers retained a law firm based in Texas to defend SHR.

Environmental Remediation -

Amounts charged to expense for various activities related to environmental monitoring, compliance, and improvements were approximately $165,000$119,000 and $144,000$136,000 for the three months and $444,000 and $437,000 for the nine months ended March 31,September 30, 2017, and 2016, respectively.







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

FORWARD LOOKING AND CAUTIONARY STATEMENTS

Except for the historical information and discussion contained herein, statements contained in this release may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, including the following: a downturn in the economic environment; the Company's failure to meet growth and productivity objectives; fluctuations in revenues and purchases; impact of local legal, economic, political and health conditions; adverse effects from environmental matters, tax matters and the Company's pension plans; ineffective internal controls; the Company's use of accounting estimates; competitive conditions; the Company's ability to attract and retain key personnel and its reliance on critical skills; impact of relationships with critical suppliers; currency fluctuations; impact of changes in market liquidity conditions and customer credit risk on receivables; the Company's ability to successfully manage acquisitions and alliances; general economic conditions domestically and internationally; insufficient cash flows from operating activities; difficulties in obtaining financing; outstanding debt and other financial and legal obligations; industry cycles; specialty petrochemical product and mineral prices; feedstock availability; technological developments; regulatory changes; foreign government instability; foreign legal and political concepts; and foreign currency fluctuations, as well as other risks detailed in the Company's filings with the U.S. Securities and Exchange Commission, including this release, all of which are difficult to predict and many of which are beyond the Company's control.

Overview

The following discussion and analysis of our financial results, as well as the accompanying unaudited consolidated financial statements and related notes to consolidated financial statements to which they refer, are the responsibility of our management.  Our accounting and financial reporting fairly reflect our business model involving the manufacturing and marketing of petrochemical products and synthetic waxes.  Our business model involves the manufacture and sale of tangible products and the provision of custom processing services.  Our consistent approach to providing high purity products and quality services to our customers has helped to sustainmaintain our current position as a preferred supplier of various petrochemical products.

The discussion and analysis of financial condition and the results of operations which appears below should be read in conjunction with the Management's Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements which appear in our Annual Report on Form 10-K for the year ended December 31, 2016.

We believe we are well-positioned to benefit from capital investments being executed withinthat we have recently completed or that are in progress.  As a result of the company.  WeD Train expansion which was completed in 2014, we now have sufficient pentane capacity to readily maintain our share of market growth for the foreseeable future.  Both the advanced reformer unit and the hydrogenation/distillation project will provide increased revenue and gross margin.  While petrochemical prices are volatile on a short-term basis and volumes depend on the demand of our customers' products and overall customer efficiency, our investment decisions are based on our long-term business outlook. 

The drop in petroleum prices, which began in mid-September of 2014 and continued into the first quarter of 2016, began reversing in the second half of 2016.  SHR's average feedstock price per gallon in the first quarter of 2017 was approximately 34% higher than the first quarter of 2016.  The contract pricing formulas used to sell the majority of the products typically have a 30 day trailing feed cost basis; and therefore, are slightly favorable during falling prices but are unfavorable when prices rise.  During the first quarter of 2017 feedstock costs were generally stable.  In addition, financial penalties incurred due to feedstock purchases below minimum amounts as prescribed by the agreement with suppliers impacted margins.

We continuedcontinue to emphasize operational excellence and our competitive advantages achieved through our high quality products and outstanding customer service and responsiveness.  We believe these attributes are an important differentiation from our competitors.

Review of FirstThird Quarter and Year-to-Date 2017 Results

We reported firstthird quarter 2017 earnings of $1.5$1.7 million down from $7.2$2.8 million from firstthird quarter 2016. Diluted earnings per share of $0.06$0.07 were reported for first quarter 2017, down from $0.29$0.11 in first quarter 2016.  We recorded equity in losses from AMAK of $1.0 million in first quarter 2017 versus equity in earnings of $5.4 million in first quarter 2016.  Sales volume of our petrochemical products decreased 14.9%; however,increased 8.2%, and sales revenue from our petrochemical products increased 4.1%11.0% as compared to firstthird quarter 2016.  Our gross profit decreased approximately $1.2 million primarily due to an increase
of approximately 34.1% in our average petrochemical feedstock cost.  Prime product petrochemical sales volumes (which exclude by-product sales) were down 5.0%up 5.5% over firstthird quarter 2016.  Wax sales revenue was up 14.9% compared to third quarter 2016.  Gross profit margin increased to 16.0% of sales in third quarter 2017 from 15.6% in third quarter 2016.

We reported year-to-date 2017 earnings of $4.0 million down from $20.3 million from the first nine months of 2016. Diluted earnings per share of $0.16 were reported for 2017, down from $0.81 in the first nine months of 2016.  During the first nine months of 2016 we recorded a bargain purchase gain on the BASF acquisition of $11.5 million and a gain on the additional equity issuance by AMAK of $3.2 million, which significantly impacted both earnings and earnings per share.  Sales volume
of our petrochemical products increased 4.3%, and sales revenue from our petrochemical products increased 14.1% as compared to the first nine months of 2016.  Prime product petrochemical sales volumes (which exclude by-product sales) were up 6.5% over the first nine months of 2016.  Wax sales revenue was up 27.6% from first nine months of 2016.  Gross profit margin declined from 20.4% to 17.6%.  This was largely due to higher feedstock costs, higher operating costs, and costs related to Hurricane Harvey.

Hurricane Harvey Impact

The financial impact of Hurricane Harvey to our company was significant.  Harvey made landfall on the Texas Gulf Coast on August 25 and affected operations at both SHR and TC.  We estimate the total negative impact to EBITDA was approximately $1.5 million to $1.8 million.  This includes expenses related to generator rentals, overtime labor, and maintenance and repairs of approximately $0.7 million.  This estimate also includes lost sales due to outages at customer and supplier facilities.  Neither of our facilities suffered any significant damage.

Non-GAAP Financial Measures

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

We define EBITDA as net income plus interest expense including derivative gains and losses, income taxes, depreciation and amortization.  We define Adjusted EBITDA as EBITDA plus share-based compensation, plus or minus equity in AMAK's earnings and losses or gains from equity issuances and plus or minus gains or losses on acquisitions.  We define Adjusted Net Income as net income plus or minus tax effected equity in AMAK's earnings and losses and plus or minus tax effected gains or losses on acquisitions.  These measures are not measures of financial performance or liquidity under U.S. GAAP and should be considered in addition to, not as a substitute for, net income (loss), nor as an indicator of cash flows reported in accordance with U.S. GAAP. These measures are used as supplemental financial measures by management and external users of our financial statements such as investors, banks, research analysts and others.  We believe that these non-GAAP measures are useful as they exclude transactions not related to our core cash operating activities.

The following table presents a reconciliation of net income, our most directly comparable GAAP financial performance measure for each of the periods presented, to EBITDA, Adjusted EBITDA, and Adjusted Net Income.

 
Three months ended
September 30,
  
Nine months ended
September 30,
 
 
Three months ended
March 31,
  2017  2016  2017  2016 
 2017  2016  (Thousands of Dollars) 
Net Income $1,487  $7,224  $1,718  $2,799  $4,037  $20,275 
                        
Interest expense  636   628   795   568   2,109   1,803 
Depreciation and amortization  2,588   2,396   2,810   2,565   7,966   7,176 
Income tax expense  1,061   3,647   577   1,768   1,970   11,107 
EBITDA $5,772  $13,895  $5,900  $7,700  $16,082  $40,361 
                        
Share-based compensation  633   647   716   608   2,005   1,882 
Bargain purchase gain on BASF acquisition  -   -   -   (11,549)
Gain from additional equity issuance by AMAK  -   (3,168)  -   (3,168)
Equity in (earnings) losses of AMAK  966   (5,367)  897   2,089   5,161   (2,261)
Adjusted EBITDA $7,371  $9,175  $7,513  $7,229  $23,248  $25,265 
                        
Net Income $1,487  $7,224  $1,718  $2,799  $4,037  $20,275 
                        
Equity in (earnings) losses of AMAK $966  $(5,367) $897  $2,089  $5,161  $(2,261)
Gain from additional equity issuance by AMAK  -   (3,168)  -   (3,168)
Bargain purchase gain on BASF acquisition  -   -   -   (11,549)
Total of equity in (earnings) losses of AMAK and bargain
purchase gain on BASF acquisition
  897   (1,079)  5,161   (16,978)
Taxes at statutory rate of 35%  338   (1,878)  314   378   1,806   5,943 
Tax effected equity in (earnings) losses  628   (3,489)
Tax effected equity in (earnings) losses of AMAK and bargain
purchase gain on BASF acquisition
  583   (701)  3,355   (11,035)
Adjusted Net Income $2,115  $3,735  $2,301  $2,098  $7,392  $9,240 

Liquidity and Capital Resources

Working Capital

Our approximate working capital days are summarized as follows:

 March 31, 2017  December 31, 2016  March 31, 2016  September 30, 2017  December 31, 2016  September 30, 2016 
Days sales outstanding in accounts receivable  39.3   38.2   32.7   34.6   38.2   34.3 
Days sales outstanding in inventory  24.2   30.2   30.2   19.6   30.2   31.8 
Days sales outstanding in accounts payable  21.2   22.9   12.3   18.9   22.9   16.0 
Days of working capital  42.4   45.5   50.6   35.4   45.5   50.2 

Our days sales outstanding in accounts receivable increaseddecreased due to an increasea decrease in wax sales and longer payment terms for some foreign customersduring September because of increased shipping times.the hurricane.  Our days sales outstanding in inventory decreased due to a concerted effort to reduce inventory on hand at both facilities.facilities and reduced production associated with the storm.  Our days sales outstanding in accounts payable decreased due to construction expenses for the hydrogenation/distillation project at TC nearing completion.  Since days of working capital is calculated using the above three metrics, it decreased for the reasons discussed.

Cash and cash equivalents decreased $4.3$4.2 million during the threenine months ended March 31,September 30, 2017, as compared to a decrease of $4.5$11.0 million for the threenine months ended March 31,September 30, 2016.  Our total available liquidity which includes cash and cash equivalents and available revolving borrowing capacity under the ARC was approximately $30.0$35.2 million and $37.9 million at March 31,September 30, 2017, and December 31, 2016, respectively.

The change in cash and cash equivalents is summarized as follows:

 2017  2016  2017  2016 
Net cash provided by (used in) (thousands of dollars)  (thousands of dollars) 
Operating activities $8,730  $5,203  $29,554  $20,074 
Investing activities  (13,907)  (7,602)  (39,336)  (27,871)
Financing activities  833   (2,072)  5,612   (3,239)
Decrease in cash and equivalents $(4,344) $(4,471)
Cash and cash equivalents $4,045  $14,152 
Decrease in cash $(4,170) $(11,036)
Cash $4,219  $7,587 

Operating Activities
Cash provided by operating activities totaled $8.7$29.6 million for the first threenine months of 2017 which was $3.5$9.5 million higher than 2016.    For the first threenine months of 2017 net income decreased by approximately $5.7$16.2 million as compared to the corresponding period of 2016. Major non-cash items affecting 2017 income included increases in deferred taxes of $1.2$1.6 million and equity in losses of AMAK of approximately $1.0$5.2 million.  Major non-cash items affecting 2016 income included increases in deferred taxes of $6.9 million, bargain purchase gain from the BASF acquisition of $11.5 million, gain from additional equity issuance by AMAK of $3.2 million and equity in earnings of AMAK of $2.3 million.

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

·
Inventory decreased approximately $2.9$5.0 million (due to an effort to decrease inventory on hand at both facilities)facilities and downtime associated with the hurricane which impacted production) as compared to an increase of approximately $1.5$2.6 million in 2016 (due to a decision to increase inventory because of planned outages)lower sales volume);

·Other liabilities increasedPrepaid expenses and other assets decreased approximately $0.1$0.4 million (primarily due to a reduction in prepaid insurance due to a finance arrangement) as compared to an increase of approximately $1.3 million in 2016 (due primarily to an increase in deferred wax sales revenue) as compared to a decreaseprepaid insurance because of approximately $1.2 million in 2016 (due to the recognition of revenue associated with a custom processing customer)higher premiums based upon our higher asset base); and

·Accounts payable and accrued liabilities increased $1.0$3.4 million (due to increasedan increase in construction expenditures) as compared to a decreasean increase of approximately $1.4$1.3 million in 2016 (due(also due to a reduction in the accrual for feedstock)increased construction expenditures).

These sources of cash were partially offset by the following decrease in cash provided by operations:

·Trade receivables increased approximately $2.1 million (due to sales to foreign customers with longer payment terms) as compared to a decrease of approximately $0.7 million (due to a decrease in the average selling price); and

·Income tax receivable increaseddecreased $0.2 million (due to an adjustment to deferredcurrent taxes related to the change to the LIFO method for inventory valuation) as compared to a decrease of approximately $2.2$4.1 million in 2016 (due to the overpayment being applied to 2016 estimated taxes).

Investing Activities

Cash used by investing activities during the first threenine months of 2017 was approximately $13.9$39.3 million, representing an increase of approximately $6.3$11.5 million over the corresponding period of 2016.  During the first threenine months of 2017, we continued to purchase equipmentthe primary use of capital expenditures was for the hydrogenation/distillation unit and the new advanced reformer unit along with some tankage and various other facility improvements.unit.  During the first threenine months of 2016 we purchased equipment for the hydrogenation/distillation expansion,unit, construction of the new reformer unit, a new cooling tower, and the new custom processing unit; upgraded roads throughout the petrochemical facility; continued to make improvements to storage; purchased the BASF facility; and made various other facility improvements.

Financing Activities

Cash provided by financing activities during the first threenine months of 2017 was approximately $0.8$5.6 million versus cash used of $2.1$3.2 million during the corresponding period of 2016.  During 2017 we made principal payments on our acquisition loan of $3.5$7.0 million and our term debt of $0.7$1.3 million.  We drew $5.0$14.0 million on our line of credit to fund ongoing capital
projects.  During 2016 we drew $3.0 million on our line of credit made principal payments on our acquisition loan of $1.8$5.3 million and our term debt of $0.3$1.0 million.

Anticipated Cash Needs

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

Results of Operations

Comparison of Three Months Ended March 31,September 30, 2017 and 2016

Specialty Petrochemical Segment

 2017  2016  Change  %Change  2017  2016  Change  %Change 
 (thousands of dollars)  (thousands of dollars) 
Petrochemical Product Sales $44,391  $42,624  $1,767   4.1% $52,440  $47,250  $5,190   11.0%
Processing  1,488   1,441   47   3.3%  1,519   2,909   (1,390)  (47.8%)
Gross Revenue $45,879  $44,065  $1,814   4.1% $53,959  $50,159  $3,800   7.6%
                                
Volume of Sales (gallons)                                
Petrochemical Products  17,324   20,353   (3,029)  (14.9%)  22,353   20,665   1,688   8.2%
Prime Product Sales  13,892   14,616   (724)  (5.0%)  16,681   15,818   863   5.5%
                                
Cost of Sales $36,358  $34,495  $1,863   5.4% $43,424  $41,531  $1,893   4.6%
Gross Margin  20.8%  21.7%      (1.0%)  19.5%  17.2%  2.3%  13.5%
Total Operating Expense**  12,969   13,202   (233)  (1.8%)  15,040   16,686   (1,646)  (9.9%)
Natural Gas Expense**  1,084   772   312   40.4%  1,106   992   114   11.5%
Operating Labor Costs**  3,243   3,821   (578)  (15.1%)  4,412   4,084   328   8.0%
Transportation Costs**  5,696   5,473   223   4.1%  6,051   6,701   (650)  (9.7%)
General & Administrative Expense  2,696   2,346   350   14.9%  2,595   2,105   490   23.3%
Depreciation and Amortization*  1,556   1,337   219   16.4%  1,584   1,447   137   9.5%
Capital Expenditures $8,756  $5,662  $3,094   54.6% $9,426  $5,411  $4,015   74.2%
*Includes $1,389$1,378 and $1,188$1,291 for 2017 and 2016, respectively, which is included in operating expense
** Included in cost of sales

Gross Revenue

Gross Revenue increased during the firstthird quarter of 2017 from third quarter 2016 by approximately 4.1%7.6% primarily due to an increase in the average selling price of 23.0%1.6% and volume of 8.2% partially offset by a decrease in volume of 14.9%.processing revenue.

Petrochemical Product Sales

Petrochemical product sales increased by 4.1%11.0% during firstthird quarter 2017 from third quarter 2016 due to an increase in the average selling price of 23.0%1.6% and a decreasean increase in volume sold of 14.9%8.2%.  Our average selling price increased because of two
reasons.  First, by-product selling prices were significantly higher in the third quarter of 2017 compared to the third quarter of 2016; and second, a large portion of our prime product sales  are contracted with pricing formulas which are tied to prior month Natural Gas Liquid (NGL) prices which is our primary feedstock.  Feedstock prices were significantly higher in firstthird quarter of 2017 as compared to firstthird quarter 2016.  TotalPrime product volume increased 5.5% in third quarter 2017 as compared to third quarter.  Due to the need to produce additional prime products to support the increase in sales volume, decreased fromour by-product volume increased 17.0%.  It should be noted that by-product margins are significantly lower than margins for our prime products.  By-product margins in the third quarter of 2017 were higher compared to third quarter of 2016 primarilymainly due to a decreasehigher values for certain components in prime product sales to one customer and a decrease of approximately 2.3 million gallons in by-product sales.the by-products.  Foreign sales volume decreased to 19.6%17.3% of total petrochemical volume from 20.7%25.7% in firstthird quarter 2016.

Processing

Processing revenues increased 3.3%decreased 47.8% during the firstthird quarter of 2017 from 2016 reflectingdue to a relatively stable revenue stream.decrease in reimbursements from a processing customer.

Cost of Sales

Cost of Sales increased 5.4%4.6% during firstthird quarter 2017 from 2016 primarily due to the increase in feedstock cost.cost and volume.  Our average feedstock cost per gallon increased 34.1%3.2% over firstthird quarter 2016.  This2016 primarily due to an approximately 13% increase in the benchmark price of Mont Belvieu natural gasoline, which was partially offset by a decreaselower penalty payments and other delivery costs.  The increase in volumefeedstock costs compressed margins for the spot or non-formula portion of prime product sales.  These are sales which do not have pricing formulas tied to feedstock costs.  The increase in gross margin percentage from 17.2% to 19.5% was supported by lower operating expenses and an increase in margins for by-products.
Volume processed of 27.4%increased 7.1% over firstthird quarter 2016.  We use natural gasoline as feedstock which is the heavier liquid remaining after ethane, propane and butanes are removed from liquids produced by natural gas wells.  The material is a commodity product
in the oil/petrochemical markets and generally is readily available.  The price of natural gasoline normally correlates approximately 90% with the price of crude oil.  We expect our advanced reformer unit which is due online in fourthfirst quarter 20172018 to enable us to convert the less valuable components in our feed into higher value products, thereby allowing us to sell our byproducts at higher prices. The contract pricing formulas used to sell the majority of our prime products typically have a 30 day trailing feed cost basis; and therefore, are slightly favorable during periods of rapidly falling feedstock prices but are unfavorable when prices rise. 

Total Operating Expense

Total Operating Expense decreased 1.8%9.9% during firstthird quarter 2017 from 2016.  Natural gas, labor, depreciation and transportation are the largest individual expenses in this category; however, not all of these decreased.

The cost of natural gas purchased increased 40.4%11.5% during 2017 from 2016 due to higher per unit cost.cost and an increase in volume consumed.  The average price per MMBTU for firstthird quarter of 2017 was $3.33$3.22 whereas, for 2016 the per-unit cost was $2.28.$2.93.  Volume decreasedincreased slightly to approximately 320,000337,000 MMBTU from about 349,000 MMBTU331,000 MMBTU.  However, volume was down from second quarter 2017 which consumed approximately 417,000 MMBTU.  The reduction in consumption sequentially was due to lower run rates.downtime associated with the hurricane.

Labor costs were lower by 15.1% primarily due to an increase in capitalized maintenance labor for the advanced reformer project.  Also, during 2016 we incurred additional labor costs associated with turnarounds.

Depreciation was higher by 16.4%8.0% during first quarter 2017 from 2016 primarily due to 2016 capital items adding toadditional expenses associated with the depreciable base.

storm.
Transportation costs were higherlower by 4.1%9.7% primarily due to an increasea decrease in the number of isocontainers and railcars which were shipped.  These containersIsocontainers are utilized primarily for shipments overseas.

In addition, in third quarter 2016 we saw increases in plant maintenance and expenses associated with installation of a processing unit for which we were reimbursed at cost plus a markup fee.  These were minimal during 2017.

General and Administrative Expense

General and Administrative costs for firstthird quarter 2017 increased from 2016 by 14.9%23.3% primarily due to an increase in our property tax accrual because of the expiration of abatements.  Group insurance and administrative labor costs and costs for physicals also increased.

Depreciation

Depreciation increased 16.4%9.5% during third quarter 2017 from 2016 primarily due to 2016 capital expenditures increasing our depreciable base.

Capital Expenditures

Capital Expenditures increased 74.2% during third quarter 2017 from 2016 primarily due to the new advanced reformer unit project.  See additional detail above under "Investing Activities".  Due to delays caused by the impact of the hurricane and issues with improper welding by the supplier of certain equipment in the reactor section of the new unit, we now expect the advanced reformer unit to come online toward the end of first quarter 2018.

Specialty Wax Segment

  2017  2016  Change  %Change 
  (thousands of dollars) 
Product Sales $5,590  $4,864  $726   14.9%
Processing  1,959   2,119   (160)  (7.6%)
Gross Revenue $7,549  $6,983  $566   8.1%
                 
  Volume of wax sales (thousand pounds)  8,036   8,248   (212)  (2.6%)
                 
  Cost of Sales $8,216  $6,708  $1,508   22.5%
  Gross Margin  (8.8%)  4.0%  (12.8%)  (320.0%)
  General & Administrative Expense  1,107   1,238   (131)  (10.6%)
  Depreciation and Amortization*  1,208   1,105   103   9.3%
  Capital Expenditures $1,991  $4,066  $(2,075)  (51.0%)
*Includes $1,187 and $1,082 for 2017 and 2016, respectively, which is included in cost of sales

Product Sales

Product sales revenue increased 14.9% during third quarter 2017 from third quarter 2016 as we continued to see strong growth in wax sales both domestically and in export.  Polyethylene wax sales remained steady during the quarter.  However, volumes of our traditional products were impacted by the storm due to outages at our wax feed suppliers.  We continue to make progress in growing sales in our new products for our Hot Melt Adhesives ("HMA") and PVC Lubricant markets.   These products are characterized by generally higher margins and growth rates.  Sales of these products were down from the second quarter primarily due to summer slowdown at European customers and inventory build at one of our distributors.  In third quarter 2016, sales for these products were insignificant.
Processing

Processing revenues decreased 7.6% during third quarter 2017 from third quarter 2016 primarily due to the impact of the hurricane.  The entire facility was down for a full week during the storm, and when you are selling time, it means zero custom processing revenue for that week.  Additionally, we experienced start-up difficulties with the hydrogenation unit resulting in negligible processing revenues from that unit.  Further, faulty equipment in one of the units in the original plant caused an extended shutdown resulting in further loss of revenues.  This unit will be starting up shortly and running on a high value project through the end of the year.
Cost of Sales

Cost of Sales increased 22.5% during third quarter 2017 from third quarter 2016 primarily due to increases in labor, freight, equipment maintenance, and natural gas utilities.  These cost increases were primarily attributable to the start-up of the hydrogenation/distillation unit.

General and Administrative Expense

General and Administrative costs decreased 10.6% during third quarter 2017 from 2016 primarily due to a decrease in other compensation expense, accounting fees and security service expense.

Depreciation

Depreciation increased 9.3% during third quarter 2017 from 2016 primarily due to the hydrogenation/distillation unit coming online.




Capital Expenditures

Capital Expenditures decreased 51.0% during third quarter 2017 from third quarter 2016 primarily due to a decrease in expenditures for construction in progress including the hydrogenation/distillation project.  The project came online in second and third quarters 2017.

Corporate Segment

  2017  2016  Change  %Change 
  (in thousands)    
General & Administrative Expense $1,957  $1,238  $719   58.1%
Equity in earnings (losses) of AMAK  (897)  (2,089)  1,192   (57.1%)
Gain from additional equity issuance by AMAK  -   3,168   (3,168)  (100.0%)

General and Administrative Expenses

General corporate expenses increased during third quarter 2017 from third quarter 2016 primarily due to an increase in officer compensation. Officer compensation increased due to the accrual for 2017 executive bonuses and the reversal of certain accrued expenses in the third quarter of 2016, including the accrual for bonuses when it was determined they would not be awarded.

Equity in Losses of AMAK

Equity in losses of AMAK decreased during third quarter 2017 from third quarter 2016.  Since the AMAK facility was idle during 2016, they had no sales.  They recorded sales in third quarter 2017 which offset some of their expenses.

AMAK Summarized Income Statement

  
Three Months Ended
September 30,
 
  2017  2016 
  (thousands of dollars) 
Sales $9,709  $318 
         
Gross loss  1,307   4,747 
General, administrative and other expenses  2,382   2,463 
Net loss $3,689  $7,210 


AMAK continues to upgrade leadership and personnel at the site while filling all significant personnel vacancies.  Sixteen percent more copper concentrate was shipped to the port in third quarter 2017 than in second quarter 2017.  Zinc concentrate to the port was up 38% quarter on quarter.  There was one shipment of lower quality copper and zinc concentrate during the quarter.  Although AMAK is not yet fully at target throughputs and notwithstanding ongoing water quality and minor plant reliability issues; throughput rates, concentrate quality and recoveries continue to steadily improve. We reported on initial Guyan exploration results.  Exploration continues both at Guyan and the surrounding areas with a similar geological profile.  Exploration results which are expected to extend the life of the copper and zinc mine assets are anticipated later this year.




Comparison of Nine Months Ended September 30, 2017 and 2016

Specialty Petrochemical Segment

  2017  2016  Change  %Change 
  (thousands of dollars) 
Petrochemical Product Sales $147,339  $129,076  $18,263   14.1%
Processing  5,078   6,769   (1,691)  (25.0%)
Gross Revenue $152,417  $135,845  $16,572   12.2%
                 
Volume of Sales (gallons)                
  Petrochemical Products  60,512   58,018   2,494   4.3%
  Prime Product Sales  46,867   44,018   2,849   6.5%
                 
  Cost of Sales $122,351  $107,067  $15,284   14.3%
  Gross margin  19.7%  21.2%  (1.5%)  (6.9%)
  Total Operating Expense**  43,161   43,527   (366)  (0.8%)
  Natural Gas Expense**  3,545   2,405   1,140   47.4%
  Operating Labor Costs**  11,688   11,893   (205)  (1.7%)
  Transportation Costs**  18,314   17,850   464   2.6%
  General & Administrative Expense  7,914   6,821   1,093   16.0%
  Depreciation and Amortization*  4,684   4,211   473   11.2%
  Capital Expenditures $27,203  $16,812  $10,391   61.8%
*Includes $4,142 and $3,743 for 2017 and 2016, respectively, which is included in operating expense
** Included in cost of sales

Gross Revenue

Gross Revenue increased during the first nine months of 2017 from 2016 by approximately 12.2% primarily due to an increase in the average selling price of 9.4% and an increase in volume of 4.3% offset by a decrease in processing fees.

Petrochemical Product Sales

Petrochemical product sales revenue increased by 14.1% during the first nine months of 2017 from 2016 due to an increase in the average selling price of 9.4% and an increase in volume of 4.3%.  Our average selling price increased because of higher prices for prime products and by-products, driven by higher feedstock costs.  A large portion of our prime product sales are contracted with formulas which are tied to Natural Gas Liquid (NGL) prices which is our primary feedstock.  NGL prices were relatively stable during the first nine months of 2017 but were significantly higher than the first nine months of 2016.  Foreign sales volume decreased to 19.6% of total petrochemical volume from 22.7% in the first nine months of 2016.

Processing

Processing revenues decreased 25.0% during the first nine months of 2017 from 2016 due to reduced fees associated with a new customer who reimbursed us for installation expenses plus a markup during the first nine months of 2016 and outages associated with the hurricane in 2017.

Cost of Sales

Cost of Sales increased 14.3% during the first nine months of 2017 from 2016 due to the increase in NGL prices as mentioned above.  Our average feedstock cost per gallon increased 17.6%; whereas volume processed remained steady.  We use natural gasoline as feedstock which is the heavier liquid remaining after ethane, propane and butanes are removed from liquids produced by natural gas wells.  The material is a commodity product in the oil/petrochemical markets and generally is readily available.  The price of natural gasoline normally correlates approximately 90% with the price of crude oil.  The benchmark price of Mont Belvieu natural gasoline increased approximately 21% for the first nine months of 2017 compared to the same period in 2016.  The increase in feedstock cost compressed margins for the spot or non-formula portion of prime product sales.  These are sales which do not have pricing formulas tied to feedstock costs.  This factor contributed to the decline in gross margin percentage from 21.2% to 19.7%.  Our advanced reformer unit (due online in first quarter 2018) will allow us to convert many of the by-products into higher value products, thereby allowing us to sell our byproducts at higher prices.


Total Operating Expense

Total Operating Expense decreased 0.8% during the first nine months of 2017 from 2016.  Natural gas, labor, and transportation are the largest individual expenses in this category; however, not all of these decreased.

The cost of natural gas purchased increased 47.4% during 2017 from 2016 due to an increase in the average per unit cost and consumption.  The average price per MMBTU for the first nine months of 2017 was $3.32 whereas, for 2016 the per-unit cost was $2.44.  Volume consumed increased to approximately 1,075,000 MMBTU from about 989,000 MMBTU.

Labor costs were lower by 1.7% primarily due to maintenance labor being capitalized to construction in progress.

Transportation costs were higher by 2.6% primarily due to an increase in the number of isocontainer shipments during the first nine months of 2017.  These shipments increased 112.6% and are generally used for overseas shipments.

In addition, during 2016 we saw increases in plant maintenance and expenses associated with installation of a processing unit for which we were reimbursed at cost plus a markup fee.  These were minimal during 2017.

General and Administrative Expense

General and Administrative costs for the first nine months of 2017 from 2016 increased by 16.0% primarily due to an increase in our property tax accrual because of the expiration of abatements.  Group insurance and administrative labor costs also increased.

Depreciation

Depreciation increased 11.2% during the first nine months of 2017 from 2016 primarily due to 2016 capital expenditures increasing our depreciable base.

Capital Expenditures

Capital Expenditures increased 54.6%61.8% during the first quarternine months of 2017 from 2016 primarily due to expenditures related to construction of the new advanced reformer unit.  Due to delays caused by the impact of the hurricane and issues with improper welding by the supplier of certain equipment in the reactor section of the new unit, project.  See additional detail above under "Investing Activities".we now expect the advanced reformer unit to come online toward the end of first quarter 2018.


Specialty Wax Segment

 2017  2016  Change  %Change  2017  2016  Change  %Change 
 (thousands of dollars)  (thousands of dollars) 
Product Sales $6,508  $4,557  $1,951   42.8% $18,606  $14,585  $4,021   27.6%
Processing  3,155   3,578   (423)  (11.8%)  8,142   7,766   376   4.8%
Gross Revenue $9,663  $8,135  $1,528   18.8% $26,748  $22,351  $4,397   19.7%
                                
Volume of wax sales (thousand pounds)  10,664   7,076   3,588   50.7%  28,281   24,126   4,155   17.2%
                                
Cost of Sales $8,566  $5,934  $2,633   44.4% $25,219  $18,880  $6,339   33.6%
Gross Margin  11.4%  27.1%      (15.7%)  5.7%  15.5%  (9.8%)  (63.2%)
General & Administrative Expense  1,347   1,169   178   15.2%  3,729   3,582   147   4.1%
Depreciation and Amortization*  1,016   1,051   (35)  (3.3%)  3,233   2,945   288   9.8%
Capital Expenditures $5,125  $1,940  $3,185   164.2% $12,047  $11,059  $988   8.9%
*Includes $995$3,169 and $1,031$2,877 for 2017 and 2016, respectively, which is included in cost of sales

Product Sales

Product sales increased 42.8%27.6% during the first quarternine months of 2017 from the first quarternine months of 2016 primarily due to on-purpose PE wax sales which we are distributing in Latin America for a third party as we continued to see strongwell as, significant growth in wax sales both domestically and in export sales to Latin American and Europe.our high value waxes.  Polyethylene wax sales saw volume increases of approximately 16.9%, and revenue from these sales increased 20.8%.   As mentioned above, we continue to make good progress in developing high value markets for our by-product polyethylene waxes.
 
 
approximately 61.2% while revenue from these sales increased 47.2%.  In order to reduce wax inventories a strong emphasis was placed on increasing sales volumes of TC's low quality wax (which requires significantly less processing and carries a positive gross margin).  As more customers approve of the new, higher quality wax products,  lower quality wax sales will be substituted with these higher value products.  Substantial progress is being made in target market segments.   Several orders of the new Hot Melt Adhesives ("HMA") product were shipped to two local customers and three others are working on approval (one of which placed an order in April).  Two truckloads of the new PVC lubricant product in molten form were sold, the European distributor took record volumes (over one million pounds), and we received an order for our first container load of high quality wax from Asia.

Processing

Processing revenues decreased 11.8%increased 4.8% during the first quarternine months of 2017 from the first quarternine months of 2016 primarily due to increased volumes with existing customers and a number of new contracts and small trials.  Processing revenue generated from B Plant was approximately $1.7$2.2 million, in processing fees (non-use fee) whichfrom the new distillation unit was recognizedapproximately $0.2 million, and from the new hydrogenation unit was approximately $0.1 million.  Excluding the $1.6 million non-use fee that occurred for the last time in the first quarter of 2016, and expired atcustom processing revenues were up over 32% over 2016 numbers. This revenue increase occurred despite the start-up difficulties with the hydrogenation unit resulting in negligible processing revenues from that time.  We saw over $1.0 millionunit.  Further, faulty equipment in revenue from B Plant (including just over $200,000another unit caused an extended shutdown of this unit resulting in product sales).further loss of revenue.

Cost of Sales

Cost of Sales increased 44.4%33.6% during the first quarternine months of 2017 from the first quarternine months of 2016 primarily due to increases in material cost, labor, freight, repairs and maintenance of manufacturing equipment, and natural gas utilities.  These

Material cost increases were attributableincreased approximately 69.4% due to material costs associated with the acquisitionon-purpose PE wax sales we distributed into Latin America as noted above and to support the additional sales volume of B Plant in second quarter 2016 and significantly greater product sales comparedpolyethylene wax sales.  Labor increased approximately 22.8% due to a year ago.  In addition, increased overtime and the addition of new personnel in preparation for the start-up of the new hydrogenation/distillation projectproject.  Freight increased approximately 155.7% due to a change in shipping terms.  We now ship most products with destination terms.  Repairs and maintenance of equipment increased approximately 33.8% primarily due to the second quarteraddition of 2017 also resultedB Plant and the introduction of new custom processing projects.  Natural gas utilities increased approximately 84.4% due to an increase in higher costs.per unit cost as mentioned above and an increase in volume consumed because of B Plant and the new hydrogenation/distillation unit.

General and Administrative Expense

General and Administrative costs increased 15.2% duringfor the first quarternine months of 2017 from 2016 increased 4.1% primarily due to an increase in sales personnel, and higher property taxes, and property insurance due to the addition of B Plant.

Depreciation

Depreciation decreased 3.3%increased 9.8% during the first quarternine months of 2017 from 2016 primarily due to someaddition of the assets which were near end of life at purchase becoming fully depreciated.  Many of the capital expenditures during first quarter 2017 are being recorded to construction in progress for which depreciation will begin when complete.B Plant.

Capital Expenditures

Capital Expenditures increased 164.2%8.9% during the first quarternine months of 2017 from the first quarternine months of 2016 primarily due to expenditures for construction in progress including the hydrogenation/distillation project and various other smaller projects.  The hydrogenation/distillation project is complete; therefore, going forward we expect capital expenditures to return to a more normal level.

Corporate Segment

 2017  2016  Change  %Change  2017  2016  Change  %Change 
 (in thousands)     (thousands of dollars)    
General & Administrative Expense $2,178  $1,934  $244   12.6% $5,978  $5,128  $850   16.6%
Equity in earnings (losses) of AMAK  (966)  5,367   (6,333)  (118.0%)  (5,161)  2,261   (7,422)  (328.3%)
Gain from additional equity issuance by AMAK  -   3,168   (3,168)  (100.0%)

General and Administrative Expenses

General corporate expenses increased 16.6% during first quarternine months 2017 from first quarternine months 2016 primarily due to increasesan increase in officer compensation and accounting fees.compensation.  Officer compensation increased due to the addition of an officer.  Accounting fees increased primarily due to time required for additional filings because of restatements.the accrual in 2017 for executive bonuses. During 2016 we reversed the accrual for bonuses when it was determined they would not be awarded.

Equity in Earnings (Losses) of AMAK/Gain from Additional Equity Issuance by AMAK

Equity in earnings (losses) of AMAK decreased during first quarternine months 2017 from first nine months 2016 primarily due to the recognition in 2016 of a gain from a settlement which was reached with the former operator of the facility and a gain on an additional equity issuance by AMAK.  In addition, the facility recording no sales in second quarter 2016.2017 (please see Note

17 to the consolidated financial statements for the impact on our statements).  Also, during 2016 the facility was not operating; therefore, their expenses were less.


AMAK Summarized Income Statement


 
Three Months Ended
March 31,
  
Nine Months Ended
September 30,
 
 2017  2016  2017  2016 
 (Thousands of Dollars)  (thousands of dollars) 
Sales $2,256  $8,992  $11,965  $9,921 
Gross profit (loss)  (1,307)  191 
General, administrative and other  2,589   2,147 
        
Gross loss  (11,515)  (7,556)
General, administrative and other expenses  6,942   6,986 
Loss from operations  (3,896)  (1,956)  (18,457)  (14,542)
Gain on settlement with former operator  -   16,225   -   17,440 
Net income (loss) $(3,896) $14,269  $(18,457) $2,898 

The new team at AMAK continued to upgrade personnel and work on improving operations throughout the quarter.  Although there were no copper or zincShipments of concentrate sales into the period, some inventory was built at the port.  AMAK expects concentrate sales in the second quarter.  The sales shown above represent goldport continue to show steady improvement – along with quality and silver doré that were produced earlier.recoveries.  We reported on initial Guyan exploration results.  Exploration continues both at Guyan and the surrounding areas with a similar geological profile.  Exploration results as well as exploration results extendingwhich should extend the life of the copper and zinc mine assets are expected in coming quarters.later this year.

Guarantee of Saudi Industrial Development Fund ("SIDF") Loan to AMAK

As discussed in Note 1819 to the consolidated financial statements, as a condition of the Loan from the SIDF in the principal amount of 330.0 million SR (US$88.0 million) to AMAK, we were required to execute a Guarantee of up to 41% of the Loan.  The decision to provide a limited corporate guarantee in favor of AMAK was difficult as we considered numerous facts and circumstances.  One of the factors considered was that without the US$88.0 million from the SIDF, construction activity on the project would likely have ceased.  Another factor considered was that prior to making a firm commitment regarding funding, the SIDF performed its own exhaustive due diligence of the project and obviously reached the conclusion that the project is viable and capable of servicing the debt.  Yet another factor considered was our ability to reach agreement with various AMAK Saudi shareholders whereby they agreed to use best efforts to have their personal guarantees stand ahead of and pay required payments to SIDF before our corporate guarantee.  Finally, we researched numerous loans made by the SIDF to others and were unable to find a single instance where the SIDF actually called a guarantee or foreclosed on a project.  Based on the above, we determined that it was in the best interest of the Company and its shareholders to provide the limited corporate guarantee to facilitate completion of the mining project in a timely manner.   We also determined that the stand-in-front agreement in conjunction with the actual value of plant and equipment on the ground should act in concert to minimize any exposure arising from the corporate guarantee.  The total amount outstanding to the SIDF at March 31,September 30, 2017, was 310.0305.0 million Saudi Riyals (US$82.781.3 million).

Contractual Obligations

The table below summarizes the following contractual obligations (in thousands) of the Company at March 31, 2017:


  Payments due by period 
  Total  
Less than
1 year
  1-3 years  
3-5 years
  More than 5 years 
Operating Lease Obligations $20,641  $3,553  $6,702  $5,988  $4,398 
Purchase Obligations  2,309   2,309   -   -   - 
Long-Term Debt Obligations  84,833   8,333   76,500   -   - 
Total $107,783  $14,195  $83,202  $5,988  $4,398 

On October 1, 2014, we entered into an Amended and Restated Credit Agreement with the lenders which from time to time are parties to the Amended and Restated Credit Agreement (collectively, the "Lenders") and Bank of America, N.A., a national banking association, as Administrative Agent for the Lenders, and Merrill Lynch, Pierce, Fenner & Smith Incorporated as Lead Arranger.  A second amendment was entered into on March 28, 2017.  Refer to Note 9 on page 11 of this Form 10-Q for a detailed discussion.

Critical Accounting Policies and Estimates

Inventories - Finished products and feedstock are recorded at the lower of cost, determined on the first-in, first-out method (FIFO); or market for SHR.  For TC, inventory is recorded at the lower of cost or market as follows:  (1) raw material cost is calculated using the weighted-average cost method and (2) product inventory cost is calculated using the specific cost method.

Other critical accounting policies are more fully described in Note 2 of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2016. The preparation of consolidated financial statements in accordance with generally accepted accounting principles requires management to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the period reported. By their nature, these estimates, assumptions and judgments are subject to an inherent degree of uncertainty. We base our estimates, assumptions and judgments on historical experience, market trends and other factors that are believed to be reasonable under the circumstances. Estimates, assumptions and judgments are reviewed on an ongoing basis and the effects of revisions are reflected in the consolidated financial statements in the period they are determined to be necessary. Actual results may differ from these estimates under different assumptions or conditions. Our critical accounting policies have been discussed with the Audit Committee of the Board of Directors. We believe there have been no material
changes to our critical accounting policies and estimates compared to those discussed in our Annual Report on Form 10-K for the year ended December 31, 2016, except for the change in inventory valuation method from LIFO to FIFO as described in Note 5.

Recent and New Accounting Standards

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Derivative Instrument Risk

Refer to Note 1112 on page 1213 of this Form 10-Q.

Interest Rate Risk
 
Refer to Note 1112 on page 1213 of this Form 10-Q.

There have been no material changes in the Company's exposure to market risk from the disclosure included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

ITEM 4. CONTROLS AND PROCEDURES.

(a)
Evaluation of disclosure controls and procedures. Our chief executive officer and chief financial officer, with the participation of management, have evaluated the effectiveness of our "disclosure controls and procedures" (as defined in Rules 13a-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934) and determined that our disclosure controls and procedures were not effective as of the end of the period covered by this report due to the material weakness in internal control over financial reporting as described below.
Material Weakness in Internal Control over Financial Reporting

As described in Management's Report On Internal Control Over Financial Reporting in Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2016, we determined that we did not maintain effective internal control over the accounting for our investment in AMAK. Specifically, controls were not appropriately designed, adequately documented and operating effectively related to the accounting for: (1) our equity in earnings of AMAK; and (2) changes in our ownership percentage in AMAK as the result of the sale and issuance of shares of AMAK to other investors.  As a result of this material weakness, we restated our financial statements for the three months ended June 30, 2016, and September 30, 2016, respectively. This control deficiency did not result in any material adjustments to our consolidated financial statements for the year ended December 31, 2016.

Although we have made progress in the remediation of this issue, as indicated below, sufficient time needs to pass before we can conclude that newly implemented controls are operating effectively and that the material weakness has been adequately remediated.   Notwithstanding the material weakness in our internal control over financial reporting, we have concluded that the interim condensed consolidated financial statements and other financial information included in this Quarterly Report on Form 10-Q, fairly present in all material respects our financial condition, results of operations and cash flows as of, and for, the periods presented.

Remediation of Material Weakness in Internal Control over Financial Reporting

We expect to make additional improvements during the remainder of 2017.  When fullyDuring second quarter 2017 we developed and implemented and operational, wea comprehensive remediation plan.  We believe the enhanced procedures will remediate the material weakness we have identified and generally strengthen our internal control over financial reporting. The material weakness will not be considered remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.  Our goal is to remediate thisSince, we have not completed the testing and evaluation of the operating effectiveness of controls, the previously disclosed material weaknessweaknesses remain unremediated as of September 30, 2017.  Once we complete testing and our evaluation of the effectiveness of the controls by the end of the third quarter, subject to there being sufficient opportunitiesyear, we expect to conclude through testing, that the enhanced control is operating effectively.material weaknesses have been remediated.

(b)
Changes in internal control. Other than the efforts discussed immediately above in "Remediation of Material Weakness in Internal Control over Financial Reporting", there was no change in our internal control over financial reporting that occurred during the quarter ended March 31,September 30, 2017, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

None other thanThe Company is periodically named in legal actions arising from normal business activities. The Company evaluates the pending claimsmerits of these actions and, lawsuits as discussedif it determines that an unfavorable outcome is probable and can be reasonably estimated, the Company will establish the necessary reserves. We are not currently involved in Note 18legal 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 consolidated financial statements.future.

ITEM 1A. RISK FACTORS.

There have been no material changes from the risk factors previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2016.

ITEM 6. EXHIBITS.

The following documents are filed or incorporated by reference as exhibits to this Report. Exhibits marked with an asterisk (*) are management contracts orfiled herewith and exhibits marked with a compensatory plan, contract or arrangement.double asterisk (**) are furnished herewith.

Exhibit
Number
Description
3(a)10(a)
-Certificate of Incorporation of the Company as amended through the Certificate of Amendment filed with the Delaware Secretary of State on May 22, 2014 (incorporated by reference to Exhibit 3(a) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 (file No. 001-33926))
3(b)
-Restated Bylaws of the Company dated August 1, 2014 (incorporated by reference to Exhibit 3(b) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 (file No. 001-33926))
10(a)*
-Retirement Awards Program dated January 15, 2008 between Arabian American Development Company and Hatem El Khalidi (incorporated by reference to Exhibit 10(h) to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2008 (file No. 001-33926))
10(b)*
-Arabian American Development Company Stock and Incentive Plan adopted April 3, 2012 (incorporated by reference to Exhibit A to the Company's Form DEF 14A filed April 25, 2012 (file No. 001-33926))
10(c)*
-Employment Contract dated October 1, 2014, between Trecora Resources and Peter M. Loggenberg, Ph.D.
Exhibit
Number
Description
10(d)*
-Severance Agreement and Covenant not to Compete, Solicit and Disclose dated October 1, 2014, between Trecora Resources and Subsidiaries and Peter M. Loggenberg, Ph.D.
10(e)
-Articles of Association of Al Masane Al Kobra Mining Company, dated July 10, 2006 (incorporated by reference to Exhibit 10(m) to the Company's Annual Report on Form 10-K for the year ended December 31, 2009 (file No. 001-33926))
10(f)
-Bylaws of Al Masane Al Kobra Mining Company (incorporated by reference to Exhibit 10(n) to the Company's Annual Report on Form 10-K for the year ended December 31, 2009 (file No. 001-33926))
10(g)
-Letter Agreement dated August 5, 2009, between Arabian American Development Company and the other Al Masane Al Kobra Company shareholders named therein (incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed on August 27, 2009 (file No. 001-33926))
10(h)
-Limited Guarantee dated October 24, 2010, between Arabian American Development Company and the Saudi Industrial Development Fund (incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed on October 27, 2010 (file No. 001-33926))
10(i)
-Amended and Restated Credit Agreement dated October 1, 2014, between Texas Oil & Chemical Co. II, Inc. and certain subsidiaries and Bank of America, N.A. as administrative agent (incorporated by reference to Exhibit 10.2 to the Company's Form 8-K filed on October 3, 2014 (file No. 001-33926))
10(j)
-Stock Purchase Agreement dated September 19, 2014, between Trecora Resources, Texas Oil & Chemical Co. II, Inc., SSI Chusei, Inc. and Schumann/Steier Holdings, LLC (incorporated by reference to Exhibit 2.1 to the Company's Form 8-K filed on September 25, 2014 (file No. 001-33926))
10(k)
-SecondThird Amendment to Amended and Restated Credit Agreement dated as of March 28,July 25, 2017, among Texas Oil & Chemical Co. II, Inc. and certain subsidiaries and Bank of America, N.A. as administrative agent (incorporated by reference to Exhibit 99.2 to the Company's Form 8-K filed on March 30,July 27, 2017 (file No. 001-33926))
18.1
-Preferability Letter
Form of Trecora Resources Stock and Incentive Plan Restricted Stock Unit Agreement
31.1Form of Trecora Resources Stock and Incentive Plan Amended and Restated Restricted Stock Unit Agreement
-31.1**
Certification of Chief Executive Officer pursuant to Rule 13A-14(A) of the  Securities Exchange Act of 1934
-Certification of Chief Financial Officer pursuant to Rule 13A-14(A) of the  Securities Exchange Act of 1934
-Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
-Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS101.INS*
-XBRL Instance Document
101.SCH101.SCH*
-XBRL Taxonomy Schema Document
101.CAL101.CAL*
-XBRL Taxonomy Calculation Linkbase  Document
101.LAB*XBRL Taxonomy Label Linkbase Document
101.PRE*XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF*XBRL Taxonomy Extension Definition Linkbase Document
Exhibit
Number
Description
101.LAB
-XBRL Taxonomy Label Linkbase Document
101.PRE
-XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF
-XBRL Taxonomy Extension Definition Linkbase Document

SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



DATE:  May 9,November 8, 2017   TRECORA RESOURCES
                                                (Registrant)


                                                 By: /s/Sami Ahmad
                                                 Sami Ahmad
                                                 Chief Financial Officer