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



FORM 10-Q



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

For the quarterly period ended SeptemberJune 30, 20172018
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
trecoralogoa01.jpg
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(281) 980-5522

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

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

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

Large accelerated filer ____   Accelerated filer _ X__

Non-accelerated filer ____ (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).
YesNo No  X_

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

August 2, 2018: 24,486,654.



TABLE OF CONTENTS

Item Number and Description
 
 
 
 
 
 
 
 
   
20
   
31
   
31
 
 
 
 
32
   
32
   
32




PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS.

TRECORA RESOURCES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

  
SEPTEMBER 30,
2017
(unaudited)
  
DECEMBER 31,
2016
 
ASSETS
 (thousands of dollars) 
 Current Assets      
  Cash $4,219  $8,389 
  Trade receivables, net  22,738   22,193 
  Inventories  12,849   17,871 
  Prepaid expenses and other assets  3,276   3,511 
  Taxes receivable  3,764   3,983 
          Total current assets  46,846   55,947 
         
  Plant, pipeline and equipment, net
  172,048   140,009 
         
  Goodwill  21,798   21,798 
  Intangible assets, net  21,273   22,669 
  Investment in AMAK  44,225   49,386 
  Mineral properties in the United States  588   588 
  Other assets  21   87 
         
     TOTAL ASSETS $306,799  $290,484 
LIABILITIES
        
  Current Liabilities        
    Accounts payable $12,381  $13,306 
    Current portion of derivative instruments  7   58 
    Accrued liabilities  6,304   2,017 
    Current portion of post-retirement benefit  308   316 
    Current portion of long-term debt  8,061   10,145 
    Current portion of other liabilities  1,131   870 
          Total current liabilities  28,192   26,712 
         
  Long-term debt, net of current portion
  81,011   73,107 
  Post-retirement benefit, net of current portion
  897   897 
  Other liabilities, net of current portion
  1,681   2,309 
  Deferred income taxes  24,654   23,083 
     Total liabilities  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 
  Additional paid-in capital  55,344   53,474 
  Common stock in treasury, at cost  (203)  (284)
  Retained earnings  112,483   108,446 
  Total Trecora Resources Stockholders' Equity  170,075   164,087 
  Noncontrolling Interest  289   289 
   Total equity  170,364   164,376 
         
     TOTAL LIABILITIES AND EQUITY $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
 
  SEPTEMBER 30,  SEPTEMBER 30, 
  2017  2016  
2017
  2016 
  (thousands of dollars) 
REVENUES            
  Petrochemical and Product Sales $58,030  $52,115  $165,945  $143,662 
  Processing Fees  3,478   5,027   13,220   14,534 
   61,508   57,142   179,165   158,196 
                 
OPERATING COSTS AND EXPENSES                
  Cost of  Sales and Processing                
    (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  9,870   8,905   31,595   32,250 
                 
GENERAL AND ADMINISTRATIVE EXPENSES                
  General and Administrative  5,660   4,585   17,621   15,525 
  Depreciation  245   192   655   556 
   5,905   4,777   18,276   16,081 
                 
OPERATING INCOME  3,965   4,128   13,319   16,169 
                 
OTHER INCOME (EXPENSE)                
  Interest Expense  (795)  (568)  (2,109)  (1,803)
  Bargain purchase gain from acquisition  --   --   --   11,549 
  Equity in Earnings (Losses) of AMAK  (897)  (2,089)  (5,161)  2,261 
  Gain from Additional Equity Issuance by AMAK  --   3,168   --   3,168 
  Miscellaneous Income (Expense)  22   (72)  (42)  38 
   (1,670)  439   (7,312)  15,213 
                 
  INCOME BEFORE INCOME TAXES  2,295   4,567   6,007   31,382 
                 
  INCOME TAXES  577   1,768   1,970   11,107 
                 
  NET INCOME  1,718   2,799   4,037   20,275 
                 
 NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST  --   --   --   -- 
                 
 NET INCOME ATTRIBUTABLE TO TRECORA RESOURCES $1,718  $2,799  $4,037  $20,275 
                 
Basic Earnings per Common Share                
  Net Income Attributable to Trecora Resources (dollars) $0.07  $0.12  $0.17  $0.83 
                 
  Basic Weighted Average Number of Common Shares Outstanding  24,304   24,223   24,267   24,304 
                 
Diluted Earnings per Common Share                
  Net Income Attributable to Trecora Resources (dollars) $0.07  $0.11  $0.16  $0.81 
                 
  Diluted Weighted Average Number of Common Shares Outstanding  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       
  COMMON STOCK  
ADDITIONAL
PAID-IN
  
TREASURY
  
RETAINED
     
NON-
CONTROLLING
  TOTAL 
  SHARES  AMOUNT  CAPITAL  STOCK  EARNINGS  TOTAL  INTEREST  EQUITY 
  (thousands)  (thousands of dollars) 
JANUARY 1, 2017  24,222  $2,451  $53,474  $(284) $108,446  $164,087  $289  $164,376 
                                 
Stock options                                
  Issued to Directors  -   -   90   -   -   90   -   90 
  Issued to Employees  -   -   884   -   -   884   -   884 
Restricted Common Stock                                
  Issued to Directors  -   -   230   -   -   230   -   230 
  Issued to Employees  -   -   801   -   -   801   -   801 
Common stock                                
  Issued to Directors  25   -   (79)  25   -   (54)  -   (54)
  Issued to Employees  56   -   (56)  56   -   -   -   - 
Net Income  -   -   -   -   4,037   4,037   -   4,037 
                                 
September 30, 2017  24,303  $2,451  $55,344  $(203) $112,483  $170,075  $289  $170,364 

  June 30,
2018
(Unaudited)
 December 31,
2017
ASSETS (thousands of dollars)
  Current Assets
    
Cash $3,387
 $3,028
Trade receivables, net 26,467
 25,779
Insurance receivable 493
 
Inventories 17,003
 18,450
Prepaid expenses and other assets 5,188
 4,424
Taxes receivable 1,291
 5,584
Total current assets 53,829
 57,265
     
  Plant, pipeline and equipment, net
 192,084
 181,742
     
Goodwill 21,798
 21,798
Intangible assets, net 19,877
 20,808
Investment in AMAK 45,452
 45,125
Mineral properties in the United States 588
 588
     
TOTAL ASSETS $333,628
 $327,326
LIABILITIES    
Current Liabilities    
Accounts payable $11,927
 $18,347
Accrued liabilities 5,638
 3,961
Current portion of post-retirement benefit 28
 305
Current portion of long-term debt 8,061
 8,061
Current portion of other liabilities 916
 870
Total current liabilities 26,570
 31,544
     
  Long-term debt, net of current portion
 97,015
 91,021
  Post-retirement benefit, net of current portion
 365
 897
  Other liabilities, net of current portion
 1,297
 1,611
Deferred income taxes 18,315
 17,242
Total liabilities 143,562
 142,315
     
EQUITY    
  Common stock‑authorized 40 million shares of $.10 par value; issued 24.5 million in 2018 and 2017 and outstanding 24.3 million shares in 2018 and 2017
 2,451
 2,451
Additional paid-in capital 56,365
 56,012
Common stock in treasury, at cost (61) (196)
Retained earnings 131,022
 126,455
Total Trecora Resources Stockholders' Equity 189,777
 184,722
Noncontrolling Interest 289
 289
Total equity 190,066
 185,011
     
TOTAL LIABILITIES AND EQUITY $333,628
 $327,326

See notes to consolidated financial statements.


3




TRECORA RESOURCES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWSINCOME (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 

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 

  THREE MONTHS ENDED
JUNE 30,
 SIX MONTHS ENDED JUNE 30,
  2018 2017 2018 2017
  (thousands of dollars) (thousands of dollars)
REVENUES        
Petrochemical and Product Sales $63,569
 $57,016
 $130,268
 $107,915
Processing Fees 4,537
 5,099
 9,579
 9,742
  68,106
 62,115
 139,847
 117,657
         
OPERATING COSTS AND EXPENSES        
Cost of Sales and Processing        
(including depreciation and amortization of $2,837, $2,363, $5,667, and $4,746, respectively) 59,964
 51,008
 121,565
 95,932
         
    GROSS PROFIT
 8,142
 11,107
 18,282
 21,725
         
GENERAL AND ADMINISTRATIVE EXPENSES        
General and Administrative 4,554
 5,740
 10,889
 11,961
Depreciation 191
 205
 387
 410
  4,745
 5,945
 11,276
 12,371
         
OPERATING INCOME 3,397
 5,162
 7,006
 9,354
         
OTHER INCOME (EXPENSE)        
Interest Income 14
 
 21
 
Interest Expense (815) (678) (1,693) (1,314)
Equity in Earnings (Losses) of AMAK 228
 (3,298) 458
 (4,264)
Miscellaneous Expense (13) (22) (39) (64)
  (586) (3,998) (1,253) (5,642)
         
INCOME BEFORE INCOME TAXES 2,811
 1,164
 5,753
 3,712
         
INCOME TAXES 596
 332
 1,186
 1,393
         
NET INCOME 2,215
 832
 4,567
 2,319
         
NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST 
 
 
 
         
NET INCOME ATTRIBUTABLE TO TRECORA RESOURCES $2,215
 $832
 $4,567
 $2,319
         
Basic Earnings per Common Share        
Net Income Attributable to Trecora Resources (dollars) $0.09
 $0.03
 $0.19
 $0.10
         
Basic Weighted Average Number of Common Shares Outstanding 24,370
 24,256
 24,354
 24,248
         
Diluted Earnings per Common Share        
Net Income Attributable to Trecora Resources (dollars) $0.09
 $0.03
 $0.18
 $0.09
         
Diluted Weighted Average Number of Common Shares Outstanding 25,014
 25,034
 25,119
 25,044

See notes to consolidated financial statements.

2

4




TRECORA RESOURCES AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)

  TRECORA RESOURCES STOCKHOLDERS    
  COMMON STOCK 
ADDITIONAL
PAID-IN
 TREASURY RETAINED   
NON-
CONTROLLING
 TOTAL
  SHARES AMOUNT CAPITAL STOCK EARNINGS TOTAL INTEREST EQUITY
  (thousands)
 (thousands of dollars)
January 1, 2018 24,311
 $2,451
 $56,012
 $(196) $126,455
 $184,722
 $289
 $185,011
                 
Stock Options                
Issued to Directors 
 
 (10) 
 
 (10) 
 (10)
Issued to Employees 
 
 154
 
 
 154
 
 154
Cancellations (see Note 13) 
 
 (680) 
 
 (680) 
 (680)
Restricted Stock Units                
Issued to Directors 
 
 175
 
 
 175
 
 175
Issued to Employees 
 
 734
 
 
 734
 
 734
Common Stock                
Issued to Directors 
 
 (78) 37
 
 (41) 
 (41)
Issued to Employees 
 
 132
 154
 
 286
 
 286
Stock Exchange (see Notes 8 & 17) 
 
 (65) (65) 
 (130) 
 (130)
Warrants 
 
 (9) 9
 
 
 
 
Net Income 
 
 
 
 4,567
 4,567
 
 4,567
                 
June 30, 2018 24,311
 $2,451
 $56,365
 $(61) $131,022
 $189,777
 $289
 $190,066

See notes to consolidated financial statements.


3




TRECORA RESOURCES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
  SIX MONTHS ENDED
JUNE 30,
  2018 2017
  (thousands of dollars)
OPERATING ACTIVITIES    
Net Income $4,567
 $2,319
Adjustments to Reconcile Net Income    
To Net Cash Provided by Operating Activities:    
Depreciation and Amortization 4,941
 4,226
Amortization of Intangible Assets 931
 931
Unrealized Gain on Derivative Instruments 
 (38)
Stock-based Compensation 372
 1,289
Deferred Income Taxes 1,073
 505
Postretirement Obligation (809) (5)
Equity in (Earnings) Losses of AMAK (458) 4,264
Bad Debt Expense 128
 
Amortization of Loan Fees 161
 61
Changes in Operating Assets and Liabilities:    
Increase in Trade Receivables (817) (2,839)
Increase in Insurance Receivables (493) 
Decrease in Taxes Receivable 4,293
 783
Decrease in Inventories 1,448
 2,752
(Increase) Decrease in Prepaid Expenses and Other Assets (901) 36
Increase (Decrease) in Accounts Payable and Accrued Liabilities (4,742) 114
Increase in Other Liabilities 104
 1,129
Net Cash Provided by Operating Activities 9,798
 15,527
     
INVESTING ACTIVITIES    
Additions to Plant, Pipeline and Equipment (15,434) (27,833)
Advances to AMAK, net (83) (55)
Cash Used in Investing Activities (15,517) (27,888)
     
FINANCING ACTIVITIES    
Issuance of Common Stock 
 25
Net Cash Received (Paid) Related to Stock-Based Compensation 245
 (55)
Addition to Long-Term Debt 16,000
 12,000
Repayment of Long-Term Debt (10,167) (6,250)
Net Cash Provided by Financing Activities 6,078
 5,720
     
NET INCREASE (DECREASE) IN CASH 359
 (6,641)
     
CASH AT BEGINNING OF PERIOD 3,028
 8,389
     
CASH AT END OF PERIOD $3,387
 $1,748
Supplemental disclosure of cash flow information:  
Cash payments for interest $2,394
 $2,721
Cash payments for taxes, net of refunds $92
 $220
Supplemental disclosure of non-cash items:    
Capital expansion amortized to depreciation expense $210
 $435
Stock exchange (Notes 8 & 17) $130
 $

See notes to consolidated financial statements.

4




TRECORA RESOURCES AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


1. GENERAL

Organization

Trecora Resources (the "Company"), was incorporated in the State of Delaware in 1967. Our principal business activities are the manufacturing of various specialty hydrocarbons and 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, 2016.2017.

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 ninesix months ended SeptemberJune 30, 2017,2018 are not necessarily indicative of results for the year ending December 31, 2017.2018.

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, we own a 33% interest in AMAK, a Saudi Arabian closed joint stock company, which owns, operates and is developing mining assets in Saudi Arabia.  We account for our investment under the equity method of accounting.   See Note 17.

Certain reclassifications have been made to the Consolidated Balance Sheet for the year ended December 31, 2016, related to our adoption ofRevenue Recognition

The Company adopted Financial Accounting Standards Board ("FASB") Accounting Standards UpdateASC Topic 606 ("ASU"ASC 606") 2015-17Revenue from Contracts with Customers and its amendmentswith a date of the initial application of January 1, 2018. As a result, the Company has changed its accounting policy for revenue recognition as noted belowdetailed below.  ASC 606 outlines a single comprehensive model for an entity to use in Note 2.accounting for revenue arising from all contracts with customers except where revenues are in scope of another accounting standard. ASC 606 superseded the revenue recognition requirements in ASC Topic 605, "Revenue Recognition", and most industry specific guidance. ASC Topic 606 sets forth a five-step model for determining when and how revenue is recognized. Under the model, an entity is required to recognize revenue to depict the transfer of goods or services

5




to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods and services. ASC 606 also requires certain additional revenue-related disclosures.

The impactCompany applied the modified retrospective approach under ASC 606 which allows for the cumulative effect of adopting the new guidance on the date of initial application. Use of the adoption ASU 2015-17modified retrospective approach means the Company's comparative periods prior to initial application are not restated. The initial application was applied to all contracts at the date of the initial application.   The Company has determined that the adjustments using the modified retrospective approach did not have a material impact on the date of the initial application along with the disclosure of the effect on prior periods.

Accounting Policy

Beginning on January 1, 2018, revenue is measured based on a consideration specified in a contract with a customer. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer. In evaluating when a customer has control of the asset we primarily consider whether the transfer of legal title and physical delivery has occurred, whether the customer has significant risks and rewards of ownership, and whether the customer has accepted delivery and a right to payment exists. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of product sales and processing. The Company does not offer material rights of return or service-type warranties.

For the six months ended June 30, 2017 the Company recognized revenue according to FASB ASC Topic 605, "Revenue Recognition", ("ASC 605"), when (1) the customer accepted delivery of the product and title had been transferred or when the service was performed and the Company had no significant obligations remaining to be performed; (2) a final understanding as to specific nature and terms of the agreed upon transaction had occurred; (3) price was fixed and determinable; and (4) collection was assured.  Product sales generally met these criteria, and revenue was recognized, when the product was delivered or title was transferred to the customer.  Sales revenue was presented net of discounts, allowances, and sales taxes.  Freight costs billed to customers were recorded as a component of revenue.  Revenues received in advance of future sales of products or prior to the performance of services were presented as deferred revenues. Shipping and handling costs were classified as cost of product sales and processing and were expensed as incurred.

Nature of goods and services

The following is a description of principal activities – separated by reportable segments – from which the Company generates its revenue. For more detailed information about reportable segments, disaggregation of revenues, and contract balance disclosures, see Note 14.

Petrochemical segment
The petrochemical segment of the Company produces eight high purity hydrocarbons and other petroleum based products including isopentane, normal pentane, isohexane and hexane. These products are used in the production of polyethylene, packaging, polypropylene, expandable polystyrene, poly-iso/urethane foams, crude oil from the Canadian tar sands, and in the catalyst support industry. SHR's petrochemical products are typically transported to customers by rail car, tank truck, iso-container and ship.
Product Sales - The Company sells individual (distinct) products to its customers on a stand-alone basis (point-of-sale) without any further integration.  There is no significant modification of any one or more products sold to fulfill another promised product or service within any of the Company's previously issued December 31, 2016, balance sheetproduct sale transactions.  The amount of consideration received for product sales is as follows:stated within the executed invoice with the customer. Payment is typically due and collected 30 to 60 days subsequent to point of sale.
Processing Fees - The Company's promised services consist of processing customer supplied feedstocks into custom products including, if requested, services for forming, packaging, and arranging shipping.  Pursuant to Tolling Agreements the customer retains title to the feedstocks and processed products.  The performance obligation in each Tolling Agreement transaction is the processing of customer provided feedstocks into custom products and is satisfied over time.   The amount of consideration received for product sales is stated within the executed invoice with the customer. Payment is typically due and collected within 30 days subsequent to point of sale.


6




Specialty Wax segment
The specialty wax segment of Contentsthe Company manufactures and sells specialty polyethylene and poly alpha olefin waxes and also provides custom processing services for customers.
Product Sales - The Company sells individual (distinct) products to its customers on a stand-alone basis (point-of-sale) without any further integration.  There is no significant modification of any one or more products sold to fulfill another promised product or service within any of the Company's product sale transactions.  The amount of consideration received for product sales is stated within the executed invoice with the customer. Payment is typically due and collected within 30 days subsequent to point of sale.
Processing Fees - The Company's promised services consist of processing customer supplied feedstocks into custom products including, if requested, services for forming, packaging, and arranging shipping.  Pursuant to Tolling Agreements and Purchase Order Arrangements, the customer typically retains title to the feedstocks and processed products.  The performance obligation in each Tolling Agreement transaction and Purchase Order Arrangement is the processing of customer provided feedstocks into custom products and is satisfied over time.   The amount of consideration received for product sales is stated within the executed invoice with the customer. Payment is typically due and collected within 30 days subsequent to point of sale.

5

  
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 Financial Accounting Standards Board ("FASB") issued Accounting 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 Recognition and 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 before annual periods beginning after December 15, 2016. The Company is evaluatingcompleted its assessment of the impact of these amendments, although it does not expect the amendmentsadoption of ASU 2014-09 across all revenue streams.  This included reviewing current accounting policies and practices to have a significant impact toidentify potential differences that would result from applying the Company's financial position orrequirements under the new standard.  We completed contract reviews and validated results of operation. The amendments could potentially impactapplying the accounting procedures and processes over the recognition of certainnew revenue sources. The Company has begun developing processes and procedures to ensure it is fully compliant with these amendments at the date of adoption.guidance (Note 1). 

In November 2015 the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. 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 January 1, 2017. See Note 1 for effect to the Balance Sheet for December 31, 2016

In February 2016, the FASB issued ASU No. 2016-02,  Leases (Topic 842),, and has subsequently issued several supplemental and/or clarifying ASUs 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 does 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.processes. In addition, the Company will change its current accounting policies to comply with the amendments with such changes as mentioned above.

In March 2016February 2018, the FASB issued ASU No. 2016-09, 2018-02,  Compensation—Stock CompensationIncome Statement — Reporting Comprehensive Income (Topic 718)220): ImprovementsReclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. ASU 2018-02 was issued to Employee Share-Based Payment Accounting,address the income tax accounting treatment of the stranded tax effects within other comprehensive income due to the prohibition of backward tracing due to an income tax rate change that was initially recorded in other comprehensive income due to the enactment of the Tax Cuts and Jobs Act ("TCJA") on December 22, 2017, which will reduce complexitychanged the Company's income tax rate from 35% to 21%. The amendments to the ASU changed US GAAP whereby an entity may elect to reclassify the stranded tax effect from accumulated other comprehensive income to retained earnings. The amendments of the ASU may be adopted in accounting standards related to share-based payment transactions, including, among others, (1) accounting for income taxes, (2) classificationtotal or in part using a full retrospective or modified retrospective method. The amendments of excess tax benefits on the statement of cash flow, (3) forfeitures, and (4) statutory tax withholding requirements.  The ASU isare effective for annual reporting periods beginning on or after December 15, 2016, and interim periods within those annual periods.2018. Early adoption is permitted. 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,believes there iswill be no material change inimpact to the Company'sconsolidated financial position or results of operation,statements as a result of adopting this Update. For additional information on the stock-based compensation plan, see Note 13.update.


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In January 2017June 2018, the FASB issued ASU No. 2017-04, 2018-07, Intangibles – Goodwill and Other (Topic 350).Improvements to Nonemployee Share-Based Payment Accounting. ASU 2018-07 simplifies the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees, with certain exceptions. The amendments in this 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 entitiescompanies for the first interim and annual reporting periodsfiscal years beginning after December 15, 2019. Early adoption is permitted for2018, including interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it failsperiods within 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.fiscal year. 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 reduceis assessing the fair valueeffect of the reporting unit belowASU 2018-02 on 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 exceed the carrying value, such that the Company's goodwill was not considered impaired. Although the Company cannot anticipate future goodwill impairment assessments, based on the most recent assessment, it is unlikely that an impairment amount would need to be calculated and, therefore, the Company does not anticipate a material impact from these amendments to the Company'sconsolidated 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.statements.




3. TRADE RECEIVABLES

Trade receivables, net, consisted of the following:

  September 30, 2017  December 31, 2016 
  (thousands of dollars) 
Trade receivables $23,038  $22,493 
Less allowance for doubtful accounts  (300)  (300)
    Trade receivables, net $22,738  $22,193 
  June 30, 2018
 December 31, 2017
  (thousands of dollars)
Trade receivables $26,895
 $26,079
Less allowance for doubtful accounts (428) (300)
Trade receivables, net $26,467
 $25,779

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

4. PREPAID EXPENSES AND OTHER ASSETS

Prepaid expenses and other assets consisted of the following:
  June 30, 2018
 December 31, 2017
  (thousands of dollars)
Prepaid license $1,919
 $1,919
Prepaid catalyst 682
 779
Prepaid insurance 115
 
Spare parts 1,349
 954
Other prepaid expenses and assets 1,123
 772
Total $5,188
 $4,424

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

5. INVENTORIES

Inventories included the following:

  September 30, 2017  December 31, 2016 
  (thousands of dollars) 
Raw material $2,390  $3,627 
Work in process  66   12 
Finished products  9,960   14,232 
Spare parts ��433   - 
    Total inventory $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
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value of inventory to be above the FIFO value for each 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.
  June 30, 2018
 December 31, 2017
  (thousands of dollars)
Raw material $3,147
 $3,703
Work in process 
 27
Finished products 13,856
 14,720
Total inventory $17,003
 $18,450

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

Inventory included petrochemical products in transit valued at approximately $2.7$3.9 million and $2.1$3.7 million at SeptemberJune 30, 2017,2018, and December 31, 2016,2017, 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, pipeline and equipment.





8













6. PLANT, PIPELINE AND EQUIPMENT

Plant, pipeline and equipment consisted of the following:


 September 30, 2017  December 31, 2016  June 30, 2018
 December 31, 2017
 (thousands of dollars)  (thousands of dollars)
Platinum catalyst metal $1,612  $1,612  $1,612
 $1,612
Land  5,428   5,376  5,428
 5,428
Plant, pipeline and equipment  183,472   154,107  189,866
 186,946
Construction in progress  42,930   33,391  63,510
 50,996
Total plant, pipeline and equipment  233,442   194,486  260,416
 244,982
Less accumulated depreciation  (61,394)  (54,477) (68,332) (63,240)
Net plant, pipeline and equipment $172,048  $140,009  $192,084
 $181,742

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

Interest capitalized for construction was approximately $218,000$427,000 and $52,000$287,000 for the three and $878,000$731,000 and $124,000$660,000 for the ninesix months ended SeptemberJune 30, 2018 and 2017, respectively.

Labor capitalized for construction was approximately $0.9 million and September$0.9 million for the three and $2.1 million and $1.6 million for the six months ended June 30, 2016,2018, and 2017, respectively.

Construction in progress during the first ninesix months of 20172018 included equipment purchased for the hydrogenation/distillation project andvarious equipment updates to B Plant equipment at the TC facility; new reformer unit, tankage upgrades, and an addition to the rail spur at SHR.

Amortization relating to the platinum catalyst, which is included in cost of sales, was approximately $0 and $0 for the three and $0 and $25,000 for the three months and $25,000 and $72,000 for the ninesix months ended SeptemberJune 30, 2017,2018 and 2016,2017, respectively.

7. GOODWILL AND INTANGIBLE ASSETS, NET

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

The following tables summarize the gross carrying amounts and accumulated amortization of intangible assets by major class (in thousands):

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8
  June 30, 2018
 
Intangible assets subject to amortization (Definite-lived)
 Gross 
Accumulated
Amortization
 Net
Customer relationships $16,852
 $(4,213) $12,639
Non-compete agreements 94
 (71) 23
Licenses and permits 1,471
 (443) 1,028
Developed technology 6,131
 (2,299) 3,832
  24,548
 (7,026) 17,522
Intangible assets not subject to amortization (Indefinite-lived)      
Emissions Allowance 197
 
 197
Trade name 2,158
 
 2,158
Total $26,903
 $(7,026) $19,877


  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  December 31, 2017
Intangible assets subject to amortization
(Definite-lived)
 Gross  
Accumulated
Amortization
  Net  Gross 
Accumulated
Amortization
 Net
Customer relationships $16,852  $(2,527) $14,325  $16,852
 $(3,651) $13,201
Non-compete agreements  94   (43)  51  94
 (61) 33
Licenses and permits  1,471   (285)  1,186  1,471
 (390) 1,081
Developed technology  6,131   (1,379)  4,752  6,131
 (1,993) 4,138
  24,548   (4,234)  20,314  24,548
 (6,095) 18,453
Intangible assets not subject to amortization
(Indefinite-lived)
                  
Emissions Allowance  197   -   197  197
 
 197
Trade name  2,158   -   2,158  2,158
 
 2,158
Total $26,903  $(4,234) $22,669  $26,903
 $(6,095) $20,808

Amortization expense for intangible assets included in cost of sales for the three months ended SeptemberJune 30, 2017,2018, and 2016,2017, was approximately $466,000$465,000 and $471,000$466,000, and for the ninesix months ended SeptemberJune 30, 20172018, and 2016,2017, was approximately $1,396,000$931,000 and $1,415,000,$931,000, respectively.

Based on identified intangible assets that are subject to amortization as of SeptemberJune 30, 2017,2018, we expect future amortization expenses for each period to be as follows (in thousands):


  
Remainder of
2017
  
2018
  
2019
  
2020
  2021  
Thereafter
 
Customer relationships $282  $1,123  $1,123  $1,123   1,123  $8,710 
Non-compete agreements  5   19   12   -   -   - 
Licenses and permits  26   106   106   106   106   656 
Developed technology  153   613   613   613   613   1,687 
Total future amortization expense $466  $1,861  $1,854  $1,842  $1,842  $11,053 
  Total
 Remainder of 2018
 2019
 2020
 2021
 2022
 2023
 Thereafter
Customer relationships $12,639
 $562
 $1,123
 $1,123
 1,123
 1,123
 1,123
 $6,462
Non-compete agreements 23
 9
 14
 
 
 
 
 
Licenses and permits 1,028
 53
 106
 106
 101
 86
 86
 490
Developed technology 3,832
 307
 613
 613
 613
 613
 613
 460
Total future amortization expense $17,522
 $931
 $1,856
 $1,842
 $1,837
 $1,822
 $1,822
 $7,412


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 SeptemberJune 30, 2017,2018 and 2016,2017, respectively.

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  Three Months Ended
June 30, 2018
 Three Months Ended
June 30, 2017
  Income
 Shares
 
Per Share
Amount

 Income
 Shares
 
Per Share
Amount

Basic Net Income per Share:            
Net Income Attributable to Trecora Resources $2,215
 24,370
 $0.09
 $832
 24,256
 $0.03
Unvested restricted stock units   349
     379
  
Dilutive stock options outstanding   295
     399
  
Diluted Net Income per Share:            
Net Income Attributable to Trecora Resources $2,215
 25,014
 $0.09
 $832
 25,034
 $0.03
  
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 
  Six Months Ended
June 30, 2018
 Six Months Ended
June 30, 2017
  Income
 Shares
 
Per Share
Amount

 Income
 Shares
 
Per Share
Amount

Basic Net Income per Share:            
Net Income Attributable to Trecora Resources $4,567
 24,354
 $0.19
 $2,319
 24,248
 $0.10
Unvested restricted stock units   376
     350
  
Dilutive stock options outstanding   389
     446
  
Diluted Net Income per Share:            
Net Income Attributable to Trecora Resources $4,567
 25,119
 $0.18
 $2,319
 25,044
 $0.09

At SeptemberJune 30, 2018 and 2017, 924,860 and 2016, 1,334,087 and 1,348,437 potentialshares of common stock, shares, respectively, were issuable upon the exercise of options and warrants.

In first quarter 2018, we completed an exchange of shares with certain shareholders whereby such shareholders traded 65,000 common shares of TREC in exchange for 24,489 shares of our AMAK stock.  The 65,000 shares were accounted for as treasury stock.

9. ACCRUED LIABILITIES

Accrued liabilities consisted of the following:
  June 30, 2018
 December 31, 2017
  (thousands of dollars)
Accrued state taxes $295
 $272
Accrued property taxes 900
 
Accrued payroll 910
 1,407
Accrued interest 31
 30
Accrued officer compensation 600
 500
Other 2,902
 1,752
Total $5,638
 $3,961

  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 

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 increaseincreased 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.

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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 reducesreduced 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.

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For 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
1 Less than 1.50 to 1.00 2.00% 1.00% 0.25%
2 Greater than or equal to 1.50 to 1.00 but less than 2.00 to 1.00 2.25% 1.25% 0.25%
3 Greater than or equal to 2.00 to 1.00 but less than 3.00 to 1.00 2.50% 1.50% 0.375%
4 Greater than or equal to 3.00 to 1.00 but less than 3.50 to 1.00 2.75% 1.75% 0.375%
5 Greater than or equal to 3.50 to 1.00 3.00% 2.00% 0.375%

We were in compliance with all covenants at SeptemberJune 30, 2017.2018.

On July 25, 2017, Texas Oil & Chemical Co. II, Inc. ("TOCCO"), South Hampton Resources, Inc. ("SHR"), Gulf State Pipe Line Company, Inc. ("GSPL"),TOCCO, SHR, GSPL, and Trecora Chemical, Inc. ("TC")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$40.0 million to $60,000,000.$60.0 million.  There were no other changes to the Revolving Facility.  UnderFollowing the ARC as amended,effectiveness of the 3rd Amendment, we havehad a $60.0 million revolving line of credit which matures onwith a maturity date of October 1, 2019.  As of SeptemberJune 30, 2017,2018, and December 31, 2016,2017, there was a long-term amount of $23.0$45.0 million and $9.0$35.0 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 SeptemberJune 30, 2017,2018, approximately $37.0$14.9 million was available to be drawn.  Under the Second Amendment wedrawn; however, only $10.0 million could draw $31.0 million and maintainbe drawn while maintaining 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 iswas payable quarterly using a ten yearten-year commercial style amortization.  Principal iswas also payable on the last business day of each March, June, September and December in an amount equal to $1,750,000,$1.8 million, provided that the final installment would have occurred on the September 30,October 1, 2019 maturity date shall beand would have been in an amount equal to the then outstanding unpaid principal balance of the Acquisition Loan.  At SeptemberJune 30, 2018, there was a short-term amount of $7.0 million and a long-term amount of $36.8 million outstanding.  At December 31, 2017, there was a short-term amount of $7.0 million and a long-term amount of $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$40.3 million outstanding.

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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 iswas paid monthly.  Principal was also payable on the last business day of each March, June, September and December in an amount equal to $0.3 million, provided that the final installment would have occurred on the October 1, 2019 maturity date and would have been in an amount equal to the then outstanding unpaid principal balance of the Term Loans. At SeptemberJune 30, 2018, there was a short-term amount of $1.3 million and a long-term amount of $15.7 million outstanding.  At December 31, 2017, there was a short-term amount of $1.3 million and a long-term amount of $16.3$16.0 million outstanding.  At December

On July 31, 2016, there was2018, TOCCO and the Guarantors entered into a short-term amountFourth Amendment to Amended and Restated Credit Agreement, which, among other things, increased the commitment under the Revolving Facility to $75.0 million, increased term loan borrowings under the ARC to $87.5 million in a single term loan facility (the “Term Loan Facility”), comprising new term loan
borrowings and the previously outstanding borrowings under the Acquisition Loan and Term Loans, and extended the maturity date of $1.7 million and a long-term amount of $17.3 million outstanding.the ARC to July 31, 2023. See Note 20.

12




Debt issuance costs of approximately $0.6$0.3 million and $0.7$0.5 million for the periods ended SeptemberJune 30, 2017,2018 and December 31, 2016,2017, 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 SeptemberJune 30, 2017,2018, and December 31, 2016,2017, the rate was 3.74%4.38% and 3.27%4.07%, respectively.

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 
 June 30, 2018
 December 31, 2017
Acquisition loan$43,750
 $47,250
Term loan16,666
 17,333
Revolving facility45,000
 35,000
Total105,416
 99,583
Debt issuance costs(340) (501)
Total long-term debt$105,076
 $99,082
Less current portion including loan fees8,061
 8,061
Total long-term debt, less current portion including loan fees$97,015
 $91,021


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 September 30, 2017, and December 31, 2016:

Assets and Liabilities Measured at Fair Value on a Recurring Basis

     Fair Value Measurements Using 
  September 30, 2017  Level 1  Level 2  Level 3 
  (thousands of dollars) 
Liabilities:            
Interest rate swap $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, 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, trade receivables,  accounts payable, accrued liabilities, other liabilities and variable rate long term debt.  The fair value of the derivative instruments are described below.

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 HedgingHedging.; however, 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.

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We assessassessed 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. The agreement terminated in December 2017; therefore, there was no outstanding liability at June 30, 2018, and December 31, 2017.  See discussion of our derivative instruments in Note 12.

12. DERIVATIVE INSTRUMENTS

Interest Rate Swap

InOn March 21, 2008, weSHR entered into a pay-fixed, receive-variable interest rate swap agreement with Bank of America related to athe $10.0 million (later increased to $14$14.0 million) term loan secured by plant, pipeline and equipment. The effective date of the interest rate swap agreement was August 15, 2008, and terminatesterminated on December 15, 2017.  The notional amount of the interest rate swap was $1.0 million and $1.75 million at September 30, 2017, and December 31, 2016, respectively.  We receivereceived 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),LIBOR, and paypaid 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.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.


13




Due to the ARC discussed in Note 10,new debt agreements associated with the Acquisition, we believebelieved that the hedge iswas no longer entirely effective; therefore,effective.  Due to the time required to make the determination and the immateriality of the hedge, we began treating the interest rate swap as ineffective at that point.  The changes in fair value are now recorded in the Statementas of Income.  For the three months ended 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 $1,000 and a realized loss of approximately $53,000 were recorded. For the three months ended 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 $9,000 and a realized loss of approximately $100,000 were recorded.October 1, 2014.

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 of approximately $716,000$(219,000) and $608,000$656,000 during the three months and $2,005,000$372,000 and $1,882,000$1,289,000 during the ninesix months ended SeptemberJune 30, 2017,2018, and 2016,2017, respectively, was recognized.

Restricted Stock Awards

On January 17, 2018, we awarded 251 shares of restricted stock to an officer at a grant date price of $13.85.  The stock was immediately vested.  Compensation expense recognized during the three months ended June 30, 2018, was $0 and for the six months ended June 30, 2018, was $5,000.

Restricted Stock Unit Awards

On June 16, 2017,February 20, 2018, we awarded approximately 127,000102,000 shares of restricted stock units to officers at a grant date price of $11.40.$12.15.  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 SeptemberJune 30, 2017,2018, was approximately $121,000$108,000 and $161,000, respectively.for the six months ended June 30, 2018, was $144,000.

Officer compensation of approximately $95,000 and $40,000 during the three months and $207,000 and $40,000 during the six months ended June 30, 2018, and 2017, respectively, was recognized related to restricted stock unit awards granted to officers vesting through 2020.

Director compensation of approximately $56,000$81,000 and $19,000$75,000 during the three months and $169,000$165,000 and $32,000$156,000 during the ninesix months ended SeptemberJune 30, 2017,2018, and 2016,2017, respectively, was recognized related to restricted stock unit awards granted to directors vesting through 2020.

Officer compensation of approximately $106,000$79,000 and $105,000$106,000 was recognized during the three months and $316,000$176,000 and $246,000$211,000 during the ninesix months ended SeptemberJune 30, 2017,2018, and 2016,2017, respectively, related to restricted stock unit awards granted to officers.  One-half of the restricted stock units vest ratably over three 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.

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Director compensation of approximately $0 and $19,000 was recognized during the three months and $6,000 and $124,000 during the nine months ended 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 September 30, 2017, and 2016, respectively, was recognized related to restricted stock unit grants vesting through 2020.

Employee compensation of approximately $108,000$98,000 and $108,000 during the three months and $323,000$202,000 and $323,000 for$215,000 during the ninesix months ended SeptemberJune 30, 2017,2018, and 2016,2017, respectively, was recognized related to restricted stock units with a 4 yearfour years vesting period which was awarded to officers.  This restricted stock vests through 2019.

Restricted stock units activity in the first nine monthshalf of 20172018 was as follows:
 
Shares of Restricted
Stock Units
 Weighted Average Grant Date Price per Share
Outstanding at January 1, 2018387,702
 $11.39
Granted102,317
 $12.15
Forfeited(48,631) $10.88
Vested(92,513) $11.79
Outstanding at June 30, 2018348,875
 $11.53

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





14









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
 
          
Outstanding at January 1, 2017  1,348,437  $7.79    
   Granted  --   --    
   Exercised  (14,350)  2.90    
   Expired  --   --    
   Cancelled  --   --    
   Forfeited  --   --    
Outstanding at September 30, 2017  1,334,087  $7.84   4.5 
Exercisable at September 30, 2017  989,087  $8.19   4.8 
 Number of Stock Options & Warrants Weighted Average Exercise Price per Share Weighted Average Remaining Contractual Life
Outstanding at January 1, 20181,323,587
 $7.82
  
Granted
 
  
Exercised(198,727) 5.43
  
Cancelled(200,000) 3.40
  
Forfeited
 
  
Outstanding at June 30, 2018924,860
 $9.29
 4.7
Exercisable at June 30, 2018924,860
 $9.29
 4.7

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.

Directors' compensation of approximately $30,000$0 and $30,000 during the three months and $90,000$0 and $143,000$60,000 during the ninesix months ended SeptemberJune 30, 2017,2018, and 2016,2017, respectively, was recognized related to options to purchase shares vesting through 2017.

Employee compensation of approximately $277,000$0 and $308,000$298,000 during the three months and $884,000$154,000 and $926,000$607,000 during the ninesix months ended SeptemberJune 30, 2017,2018, and 2016,2017, respectively, was recognized related to options with a 44- year vesting period which were awarded to officers and key employees.  These options vest through 2018.

Post-retirement compensation of approximately $0$679,000 and $0 was recognized during the three months and $0$679,000 and $49,000$0 during the ninesix months ended SeptemberJune 30, 2018, and 2017, and 2016,was reversed related to options awarded to Mr. Hatem El Khalidi in July
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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 iswas successful in litigating its right to withdraw the options and benefits and as such, these options and benefits continue to be shown as outstanding.were reversed during the second quarter of 2018.  See further discussion in Note 19.

See the Company's Annual Report on Form 10-K for the year ended December 31, 2016,2017 for additional information.

14. SEGMENT INFORMATION

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

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


  Three Months Ended September 30, 2017 
  Petrochemical  Specialty Wax  Corporate  Consolidated 
  (in thousands) 
Product sales $52,440  $5,590  $-  $58,030 
Processing fees  1,519   1,959   -   3,478 
Total revenues  53,959   7,549   -   61,508 
Operating profit (loss) before depreciation and amortization  9,319   (587)  (1,957)  6,775 
Operating profit (loss)  7,735   (1,795)  (1,975)  3,965 
Profit (loss) before taxes  7,149   (1,975)  (2,879)  2,295 
Depreciation and amortization  1,584   1,208   18   2,810 
Capital expenditures  9,426   1,991   -   11,417 
15



  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 

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 Three Months Ended June 30, 2018
 Petrochemical
 Specialty Wax
 Corporate
 Eliminations
 Consolidated
 (in thousands)
Product sales$56,135
 $7,434
 $
 $
 $63,569
Processing fees1,685
 2,852
 
 
 4,537
Total revenues57,820
 10,286
 
 
 68,106
Operating profit (loss) before depreciation and amortization6,095
 1,164
 (834) 
 6,425
Operating profit (loss)4,440
 (201) (842) 
 3,397
Profit (loss) before taxes3,859
 (506) (542) 
 2,811
Depreciation and amortization1,655
 1,365
 8
 
 3,028
Capital expenditures3,529
 877
 
 
 4,406
  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.
 Three Months Ended June 30, 2017
 Petrochemical
 Specialty Wax
 Corporate
 Eliminations
 Consolidated
 (in thousands)
Product sales$50,508
 $6,508
 $
 
 $57,016
Processing fees2,071
 3,028
 
 
 5,099
Total revenues52,579
 9,536
 
 
 62,115
Operating profit (loss) before depreciation and amortization8,761
 810
 (1,841) 
 7,730
Operating profit (loss)7,217
 (198) (1,857) 
 5,162
Profit (loss) before taxes6,598
 (269) (5,165) 
 1,164
Depreciation and amortization1,544
 1,008
 16
 
 2,568
Capital expenditures9,021
 4,931
 
 
 13,952
 Six Months Ended June 30, 2018
 Petrochemical
 Specialty Wax
 Corporate
 Eliminations
 Consolidated
 (in thousands)
Product sales$116,420
 $13,817
 $
 $31
 $130,268
Processing fees3,713
 6,064
 
 (198) 9,579
Total revenues120,133
 19,881
 
 (167) 139,847
Operating profit (loss) before depreciation and amortization14,488
 1,554
 (2,982) 
 13,060
Operating profit (loss)11,119
 (1,115) (2,998) 
 7,006
Profit (loss) before taxes9,913
 (1,687) (2,473) 
 5,753
Depreciation and amortization3,369
 2,669
 16
 
 6,054
Capital expenditures13,812
 1,622
 
 
 15,434


  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 
16


  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 


 Six Months Ended June 30, 2017
 Petrochemical
 Specialty Wax
 Corporate
 Eliminations
 Consolidated
 (in thousands)
Product sales$94,899
 $13,016
 $
 
 $107,915
Processing fees3,559
 6,183
 
 
 9,742
Total revenues98,458
 19,199
 
 
 117,657
Operating profit (loss) before depreciation and amortization16,975
 1,555
 (4,020) 
 14,510
Operating profit (loss)13,875
 (469) (4,052) 
 9,354
Profit (loss) before taxes12,601
 (559) (8,330) 
 3,712
Depreciation and amortization3,100
 2,024
 32
 
 5,156
Capital expenditures17,777
 10,056
 
 
 27,833
 June 30, 2018
 Petrochemical
 Specialty Wax
 Corporate
 Eliminations
 Consolidated
 (in thousands)
Trade receivables, product sales$20,377
 $3,639
 $
 $
 $24,016
Trade receivables, processing fees671
 1,780
 
 
 2,451
Goodwill and intangible assets, net
 41,675
 
 
 41,675
Total assets279,161
 115,696
 92,857
 (154,086) 333,628
 December 31, 2017
 Petrochemical
 Specialty Wax
 Corporate
 Eliminations
 Consolidated
 (in thousands)
Trade receivables, product sales$20,211
 $2,671
 $
 $
 $22.882
Trade receivables, processing fees983
 1,914
 
 
 2,897
Goodwill and intangible assets, net
 42,606
 
 
 42,606
Total assets265,213
 117,579
 97,880
 (153,346) 327,326

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 that the December 31, 2014, tax return was selected for audit.  In April 2017 the audit was expanded to include the year ended December 31, 2015, to review the refund claim related to research and development activities.  TheWe received notification from the IRS in March 2018 that audit is ongoing,was complete and weacceptance of the refund claims resulting from the R&D credit for approximately $350,000, which has now been received.  We also received notification that Texas will audit our R&D credit calculations for 2014 and 2015.  We are in the process of submitting additional documentation to Texas.  We do not expect any adjustmentchanges related 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.Texas audit.  Tax returns for various jurisdictions remain open for examination for the years 20132014 through 2016.2017.  As of SeptemberJune 30, 2017,2018 and December 31, 2016,2017, respectively, we recognized no material adjustments in connection withadjustment for uncertain tax positions.positions or related interest and penalties.

The effective tax rate varies from the federal statutory rate of 21% primarily as a result of state tax expense and stock based compensation for the three and six months ended June 30, 2018.  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 for the three and six months ended June 30, 2017.  We continue to maintain a valuation allowance against certain deferred tax assets where realization is not certain.

On December 22, 2017, Public Law No. 115-97 known as the TCJA was enacted. The TCJA includes a number of changes to existing U.S. tax laws that impact the Company, most notably a reduction of the U.S. federal corporate income tax rate from a maximum of 35% to a flat 21% for tax years effective January 1, 2018. The TCJA also implements a territorial tax system, provides for a one-time deemed repatriation tax on unrepatriated foreign earnings, eliminates the alternative minimum tax (AMT), makes AMT credit carryforwards refundable, and permits the acceleration of depreciation for certain assets placed into service after September 27, 2017. In addition, the TJCA creates prospective changes beginning in 2018, including repeal of the domestic

17




manufacturing deduction, acceleration of tax revenue recognition, capitalization of research and development.  The applicationdevelopment expenditures, additional limitations on executive compensation and limitations on the deductibility of interest.

We have elected to recognize the income tax effects of the TCJA in our financial statements in accordance with Staff Accounting Bulletin 118 (SAB 118), which provides guidance for the changeapplication of ASC Topic 740  Income Taxes, in the reporting period in which the TCJA was signed into law. Under SAB 118 when a Company does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting method for inventory from LIFOcertain income tax effects of the TCJA, it will recognize provisional amounts if a reasonable estimate can be made. If a reasonable estimate cannot be made, then no impact is recognized for the effect of the TCJA. SAB 118 permits an up to FIFO andone year measurement period to finalize the change for spare parts inventory are being submittedmeasurement of the impact of the TCJA.

We have recognized the provisional tax impacts related to the IRS.acceleration of depreciation and included these amounts in our consolidated financial statements for the three and six months ended June 30, 2018. The ultimate impact may differ from these provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the we have made, additional regulatory guidance that may be issued, and actions we may take as a result of the TCJA . We did not identify items for which the income tax effects of the TCJA have not been completed, and a reasonable estimate could not be determined as of June 30, 2018, and December 31, 2017, except for changes in estimates that can result from finalizing the filing of the 2017 U.S. income tax return, which are not anticipated to be material.

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 13 and 19.  All amounts which havehad not met termination dates remainremained recorded until a resolution iswas achieved. The matter was resolved on May 25, 2018 and as of June 30, 2018, post-retirement obligations of approximately $1.0 million for Mr. El Khalidi have been reversed. As of September 30, 2017, and December 31, 2016,2017, approximately $1.01.0 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 SeptemberJune 30, 2017,2018 and December 31, 2016,2017, approximately $0.2 million and $0.3 million, respectively, remained outstanding and was included in post-retirement obligations.

In June 2018 we entered into a retirement agreement with former VP, Accounting & Compliance, Connie Cook. As of June 30, 2018, approximately $0.2 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, 2016,2017 for additional information.

17. INVESTMENT IN AMAK

In July 2016first quarter 2018, we completed an exchange of shares with certain shareholders whereby such shareholders traded 65,000 common shares of TREC in exchange for 24,489 shares of our AMAK issued four millionstock.  The 65,000 shares to provide additional fundswere accounted 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 reducingtreasury stock.  This transaction reduced our ownership percentage in AMAKfrom 33.44% to 33.44% from 35.25%33.41%.

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As of SeptemberJune 30, 2017,2018, and December 31, 2016,2017, the Company had a non-controlling equity interest of 33.44%33.4% in AMAK of approximately $44.2$45.5 million and $49.4$45.1 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 SeptemberJune 30, 2017.2018.

AMAK's financial statements were prepared in the functional currency of AMAK which is the Saudi Riyal (SR)("SR").  In June 1986 the SR was officially pegged to the U. S. Dollar (USD)("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:








18





Results of Operations

  
Three Months Ended September 30,
  
Nine Months Ended September 30,
 
  
2017
  
2016
  
2017
  
2016
 
  (Thousands of Dollars) 
Sales $9,709  $318  $11,965  $9,921 
                 
Gross loss  (1,307)  (4,747)  (11,515)  (7,556)
General, administrative and other expenses  2,382   2,463   6,942   6,986 
Loss from operations $(3,689) $(7,210) $(18,457) $(14,542)
Gain on settlements with former operator  -   -   -   17,440 
Net income (loss) $(3,689) $(7,210) $(18,457) $2,898 

Gain on settlements with former operator of approximately $0 during the three months ended 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.
  Three Months Ended June 30, Six Months Ended June 30,
  2018
 2017
 2018
 2017
  (thousands of dollars) (thousands of dollars)
Sales $19,494
 $
 $33,581
 $2,256
Cost of sales 16,555
 8,901
 29,061
 12,463
Gross profit (loss) $2,939
 $(8,901) $4,520
 $(10,207)
General, administrative and other expenses 3,265
 1,971
 5,166
 4,559
Net Loss $(326) $(10,872) $(646) $(14,766)
Depreciation and amortization 8,281
 7,609
 15,982
 10,664
Net income (loss) before depreciation and amortization $7,955
 $(3,263) $15,336
 $(4,102)

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

  
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

  
September 30,
  
December 31,
 
  
2017
  
2016
 
  (Thousands of Dollars) 
Current assets $22,839  $22,860 
Noncurrent assets  247,335   251,741 
Total assets $270,174  $274,601 
         
Current liabilities $26,315  $8,005 
Long term liabilities  78,265   82,546 
Shareholders' equity  165,594   184,050 
  $270,174  $274,601 
  June 30,
 December 31,
  2018
 2017
  (thousands of dollars)
Current assets $33,273
 $23,333
Noncurrent assets 228,733
 237,875
Total assets $262,006
 $261,208
     
Current liabilities $22,873
 $24,439
Long term liabilities 71,520
 68,837
Shareholders' equity 167,613
 167,932
  $262,006
 $261,208

The equity in the income or loss of AMAK reflected on the consolidated statements of income for the three months and ninesix months ended SeptemberJune 30, 2017,2018, and 2016,2017, is comprised of the following:

17


  Three Months Ended
June 30,
 Six Months Ended
June 30,
  2018
 2017
 2018
 2017
  (thousands of dollars) (thousands of dollars)
AMAK Net Loss $(326) $(10,872) $(646) $(14,766)
         
Company's share of loss reported by AMAK $(109) $(3,635) $(216) $(4,938)
Amortization of difference between Company's investment in AMAK and Company's share of net assets of AMAK 337
 337
 674
 674
Equity in earnings (loss) of AMAK $228
 $(3,298) $458
 $(4,264)
  
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, 2016,2017 for additional information.

We have an advance dueAt June 30, 2018, and December 31, 2017, we had a receivable from AMAK for reimbursement of fees associated with AMAKapproximately $204,000 and $121,000, respectively, relating to unreimbursed travel and Board meetings.expenses which are included in prepaid and other assets.  We havedid not advancedadvance any cash to AMAK during 2017.2018.

18. RELATED PARTY TRANSACTIONS


19




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

Consulting fees of approximately $19,000 and $17,000$18,000 were incurred during the three months and $56,000$50,000 and $52,000$37,000 during the ninesix months ended SeptemberJune 30, 2017,2018, and 2016,2017, respectively, from our Executive 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.  In March 2018, a new consulting agreement was entered into with Mr. Carter effective through December 31, 2018, unless otherwise agreed by the Company and Mr. Carter.

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 iswas originally 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 135.33135.3 million Saudi Riyals (US$36.1 million). The loan was necessary to continue construction of the AMAK facilities and provide working capital needs.  We received no consideration in connection with extending the guarantee and did so to maintain and enhance the value of its investment.  On July 8, 2018, the SIDF loan was amended to adjust the repayment schedule and extend the repayment terms through April 2024. Under the new payment terms the current amount due to SIDF in 2019 is $8,000,000. The total amount outstanding to the SIDF at SeptemberJune 30, 2017,2018, was 305.0 million Saudi Riyals (US$81.3 million).

Litigation -Operating Lease Commitments

From time to time, we may become party to litigation or other legal proceedings that we consider to be a partWe have operating leases for the rental of railcars, office space, and equipment with expiration dates through 2026.  Rental expense for these operating leases for 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 inthree months ended June 30, 2018, and 2017, was $1.0 million and $0.8 million, respectively, and for the future.six months ended June 30, 2018, and 2017, was $2.1 million and $1.6 million, respectively.

Litigation

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, theThe Trial Court dismissed all of Mr. El Khalidi's claims and causes of action with prejudice.prejudice and the Ninth Court of Appeals affirmed. Mr. El Khalidi appealed,filed a petition for review with the Supreme Court of Texas, which was denied April 6, 2018.  Mr. El Khalidi filed a motion for rehearing of his petition for review with the Supreme Court of Texas on April 23, 2018.  On May 25, 2018, the Supreme Court of Texas denied the motion for rehearing and the issuesmatter is considered closed.

The Company is periodically named in legal actions arising from normal business activities.  We evaluate the merits of these actions and, if we determine that an unfavorable outcome is probable and can be reasonably estimated, we will establish the necessary reserves.  We are not currently involved in legal proceedings that could reasonably be expected to have been fully briefed.  Liabilitiesa material adverse effect on our business, prospects, financial condition or results of approximately $1.0operations. We may become involved in material legal proceedings in the future.

Supplier Agreements

From time to time, we may incur shortfall fees due to feedstock purchases being below the minimum amounts prescribed by our agreements with our suppliers.  Shortfall fee expenses for the three months ended June 30, 2018, and 2017, were $0.4 million remain recorded, and $0.9 million, respectively, and for the options will continue to accrue in accordance with their own terms until all matters are resolved.
six months ended June 30, 2018, and 2017, were $0.5 million and $1.8 million, respectively.

Environmental Remediation


18

Environmental Remediation -
20




Amounts charged to expense for various activities related to environmental monitoring, compliance, and improvements were approximately $119,000$154,000 and $136,000$160,000 for the three months ended and $444,000$303,000 and $437,000$325,000 for the ninesix months ended SeptemberJune 30, 2017,2018, and 2016,2017, respectively.


20. SUBSEQUENT EVENTS


On July 31, 2018, TOCCO and the Guarantors entered into a Fourth Amendment to Amended and Restated Credit Agreement (“4th Amendment”) with the lenders party thereto, Bank of America, N.A., as Administrative Agent, Swingline Lender and L/C Issuer, and Citibank, N.A., as an L/C Issuer. Pursuant to 4th Amendment, the commitment under the Revolving Facility of the ARC was increased from $60.0 million to $75.0 million. TOCCO also increased total term loan borrowings under the ARC to $87.5 million in the Term Loan Facility, comprising new term loan borrowings and the previously outstanding borrowings under the Acquisition Loan and Term Loans. Proceeds of the new borrowings under the Term Loan Facility were used to repay a portion of the outstanding borrowings under the Revolving Facility and pay fees and expenses of the transaction. The 4th Amendment also increased the size of the accordion feature allowing TOCCO to request an increase in the commitment under the Revolving Facility and/or the Term Loan Facility by an additional amount of up to $50.0 million in the aggregate, subject to the lenders acceptance of any increased commitment and certain other conditions. As of the date of this Quarterly Report on Form 10-Q, there was approximately $19.0 million in borrowings outstanding under the Revolving Facility and $87.5 million in borrowings under the Term Loan Facility. The Fourth Amendment to the Amended and Restated Credit Agreement increased our available revolving borrowing capacity to approximately $55.9 million.
Pursuant to the 4th Amendment, the maturity date for borrowings under the ARC was extended from October 1, 2019 to July 31, 2023. The interest rates margins applicable to borrowings under the ARC were also reduced to LIBOR plus an applicable margin ranging from 1.25% to 2.25% or, at the option of TOCCO, the base rate plus an applicable margin ranging from 0.25% to 1.25%, in each case, with the applicable margin being determined based on the Consolidated Leverage Ratio (as defined in the ARC) of TOCCO. A commitment fee between 0.20% and 0.30% is also payable quarterly on the unused portion of the Revolving Facility. Borrowings under the Term Loan Facility continue to be subject to quarterly amortization payments based on a commercial style amortization method over a twenty year period; provided that the final principal installment will be paid on the maturity date and will be in an amount equal to the outstanding borrowings under the Term Loan Facility on such date.
The Fourth Amendment also modified certain covenants and other provisions of the ARC to provide us with additional flexibility, including (i) increasing the maximum Consolidated Leverage Ratio that must be maintained by TOCCO to 3.50 to 1.00 (subject to temporary increase following certain acquisitions), with compliance to begin with the quarter ended December 31, 2018, (ii) decreasing the minimum Consolidated Fixed Charge Coverage Ratio (as defined in the ARC) that must be maintained by TOCCO to 1.15 to 1.00 and (iii) eliminating the requirement that TOCCO maintain a minimum asset coverage ratio.


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

FORWARD LOOKING AND CAUTIONARY STATEMENTS

Except forSome of the historicalstatements and information and discussion contained herein, statements contained in this releaseQuarterly Report on Form 10-Q 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,report, all of which are difficult to predict and many of which are beyond the Company's control.

Overview


21




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 involvingwhich is based on the safe 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 maintain 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, 2016.2017.

We believe we are well-positioned to benefit from capital investments that we have recently completed or that are in progress.completed.  As a result of the D TrainD-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 providecontribute to increased revenue and gross margin.margin over time.  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. 

In February 2018, while attempting to commission the advanced reformer, the unit overheated and ignited a fire. There was damage to all six heaters in the unit, and the damaged equipment had to be replaced. The total repair cost was approximately $3.5 million. Our insurers agreed to cover costs over our $1 million deductible. In the second quarter we received an initial advance payment of approximately $2 million, and we expect to receive the balance in the third quarter.

On July 9, 2018, we announced the safe and successful start up of our advanced reformer unit at our Silsbee facility.

We continue to emphasize operational excellence and our competitive advantages achieved through our high quality products and outstanding customer service and responsiveness.  We believeConsistent with these attributes are an important differentiation fromobjectives, we strengthened our competitors.management team with the recent appointments of Chief Manufacturing Officer and Executive Vice President, Commercial.


Review of ThirdSecond Quarter and Year-to-Date 20172018 Results

We reported thirdsecond quarter 20172018 earnings of $1.7$2.2 million downup from $2.8$0.8 million from thirdsecond quarter 2016.2017. Diluted earnings per share of $0.07$0.09 were reported for 2017, down2018, up from $0.11$0.03 in 2016.2017.  Sales volume of our petrochemical products increased 8.2%decreased 5.3%, and sales revenue from our petrochemical products increased 11.0%10.8% as compared to thirdsecond quarter 2016.2017.  Prime product petrochemical sales volumes (which exclude by-product sales) were up 5.5%down 1.2% over thirdsecond quarter 2016.2017.  Wax sales revenue
was up 14.9%15.3% compared to thirdsecond quarter 2016.  Gross2017.  Trecora Resources gross profit margin increaseddecreased to 16.0%12.0% of sales in thirdsecond quarter 20172018 from 15.6%17.9% in thirdsecond 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
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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.
2017.

Non-GAAP Financial Measures

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

We 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,
 
  2017  2016  2017  2016 
  (Thousands of Dollars) 
Net Income $1,718  $2,799  $4,037  $20,275 
                 
    Interest expense  795   568   2,109   1,803 
    Depreciation and amortization  2,810   2,565   7,966   7,176 
    Income tax expense  577   1,768   1,970   11,107 
EBITDA $5,900  $7,700  $16,082  $40,361 
                 
    Share-based compensation  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  897   2,089   5,161   (2,261)
Adjusted EBITDA $7,513  $7,229  $23,248  $25,265 
                 
Net Income $1,718  $2,799  $4,037  $20,275 
                 
        Equity in (earnings) losses of AMAK $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%  314   378   1,806   5,943 
    Tax effected equity in (earnings) losses of AMAK and bargain
     purchase gain on BASF acquisition
  583   (701)  3,355   (11,035)
Adjusted Net Income $2,301  $2,098  $7,392  $9,240 

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22





  Three Months Ended
June 30,
 Six Months Ended
June 30,
  2018
 2017
 2018
 2017
  (Thousands of Dollars)
Net Income $2,215
 $832
 $4,567
 $2,319
Interest expense 815
 678
 1,693
 1,314
Depreciation and amortization 3,028
 2,568
 6,054
 5,156
Income tax expense 596
 332
 1,186
 1,393
EBITDA $6,654
 $4,410
 $13,500
 $10,182
Share-based compensation (220) 656
 372
 1,289
Equity in (earnings) losses of AMAK (228) 3,298
 (458) 4,264
Adjusted EBITDA $6,206
 $8,364
 $13,414
 $15,735
Net Income $2,215
 $832
 $4,567
 $2,319
Equity in (earnings) losses of AMAK $(228) $3,298
 $(458) $4,264
Taxes at statutory rate of 21% for 2018 and 35% for 2017 48
 (1,154) 96
 (1,492)
Tax effected equity in (earnings) losses (180) 2,144
 (362) 2,772
Adjusted Net Income $2,035
 $2,976
 $4,205
 $5,091

Liquidity and Capital Resources

Working Capital

Our approximate working capital days are summarized as follows:

  September 30, 2017  December 31, 2016  September 30, 2016 
Days sales outstanding in accounts receivable  34.6   38.2   34.3 
Days sales outstanding in inventory  19.6   30.2   31.8 
Days sales outstanding in accounts payable  18.9   22.9   16.0 
Days of working capital  35.4   45.5   50.2 
 June 30, 2018
 December 31, 2017
 June 30, 2017
Days sales outstanding in accounts receivable34.3
 38.4
 38.5
Days sales outstanding in inventory22.0
 27.5
 25.4
Days sales outstanding in accounts payable15.4
 27.3
 16.7
Days of working capital40.8
 38.5
 45.1

Our days sales outstanding in accounts receivable decreased due to a decreasean increase in sales volume during September because of the hurricane.January which were paid before quarter end and are, therefore, not reflected in accounts receivable.  Our days sales outstanding in inventory decreased also due to a concerted effort to reducethe increase in sales volume which reduced inventory on hand at both facilities and reduced production associated with the storm.hand.  Our days sales outstanding in accounts payable decreased due to construction expenses for the hydrogenation/distillation project at TCnew advanced reformer unit nearing completion.  Since days of working capital is calculated using the above three metrics, it decreasedincreased for the reasons discussed.

Cash decreased $4.2increased $0.4 million during the ninesix months ended SeptemberJune 30, 2017,2018, as compared to a decrease of $11.0$6.6 million for the ninesix months ended SeptemberJune 30, 2016.2017.  Our total available liquidity, which includes cash and available revolving borrowing capacity under the ARC, was approximately $35.2$18.4 million and $37.9 million at SeptemberJune 30, 2017,2018, and December 31, 2016,2017, respectively. The Fourth Amendment to the Amended and Restated Credit Agreement, entered into as of July 31, 2018 as discussed in Note 20, increased our available revolving borrowing capacity to approximately $55.9 million.

The change in cash is summarized as follows:

  2017  2016 
Net cash provided by (used in) (thousands of dollars) 
Operating activities $29,554  $20,074 
Investing activities  (39,336)  (27,871)
Financing activities  5,612   (3,239)
Decrease in cash $(4,170) $(11,036)
Cash $4,219  $7,587 
  2018
 2017
Net cash provided by (used in) (thousands of dollars)
Operating activities $9,798
 $15,527
Investing activities (15,517) (27,888)
Financing activities 6,078
 5,720
Increase (decrease) in cash $359
 $(6,641)
Cash $3,387
 $1,748

23





Operating Activities
Cash provided by operating activities totaled $29.6$9.8 million for the first ninesix months of 2017 $9.52018, $5.7 million higherlower than 2016.2017.    For the first ninesix months of 20172018 net income decreasedincreased by approximately $16.2$2.25 million as compared to the corresponding period2017.  Major non-cash items affecting 2018 income included increases in deferred taxes of 2016.$1.1 million, depreciation of $4.9 million and equity in earnings of AMAK of $0.5 million.  Major non-cash items affecting 2017 income included increases in deferred taxes of $1.6$0.5 million, depreciation of $4.2 million, and equity in losses of AMAK of $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 $2.3approximately $4.3 million.

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

·
Inventory decreased approximately $5.0 million (due to an effort to decrease inventory on hand at both facilities and downtime associated with the hurricane which impacted production) as compared to an increase of approximately $2.6 million in 2016 (due to lower sales volume);
Insurance receivable increased approximately $0.5 million (due to a claim filed for the new advanced reformer fire)  as compared to no receivable in 2017;

·Prepaid expenses and other assets decreased approximately $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 prepaid insurance because of higher premiums based upon our higher asset base)Prepaid and other assets increased approximately $0.9 million (primarily due to the inventorying of spare parts) as compared to a decrease of approximately $36,000 in 2017 (primarily due to a reduction in prepaid insurance); and

·Accounts payable and accrued liabilities increased $3.4Accounts payable and accrued liabilities decreased $4.7 million (due to decreased construction expenditures) as compared to an increase of approximately $0.1 million in 2017 (due to an increase in construction expenditures) as compared to an increase of approximately $1.3 million in 2016 (also due to increased construction expenditures).

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

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

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22

Investing Activities

Cash used by investing activities during the first ninesix months of 20172018 was approximately $39.3$15.5 million, representing an increasea decrease of approximately $11.5$12.4 million over the corresponding period of 2016.2017.   During the first ninesix months of 2017,2018, the primary use of capital expenditures was for the the new advanced reformer unit and the addition of a rail spur at the SHR loading facility.  During the first six months of 2017, we continued to purchase equipment for the hydrogenation/distillation unit and the new advanced reformer unit.  During the first nine months of 2016 we purchased equipment for the hydrogenation/distillation unit construction of the new reformer unit, a new cooling tower,along with some tankage 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 ninesix months of 20172018 was approximately $5.6$6.1 million versus cash usedprovided of $3.2$5.7 million during the corresponding period of 2016.2017.  During 20172018, we made principal payments on our acquisition loan of $7.0$3.5 million, and our term debt of $1.3$0.7 million, and our line of credit facility of $6.0 million.  We drew $14.0$16.0 million on our line of credit to fund ongoing capital projects.  During 20162017, we drew $3.0 million on our line of credit made principal payments on our acquisition loan of $5.3$3.5 million, and our term debt of $1.0$0.7 million, and our line of credit facility of $2.0 million. We drew $12.0 million on our line of credit to fund ongoing capital projects.

Anticipated Cash Needs

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

Results of Operations

Comparison of Three Months Ended SeptemberJune 30, 20172018 and 20162017

Specialty Petrochemical Segment

  2017  2016  Change  %Change 
  (thousands of dollars) 
Petrochemical Product Sales $52,440  $47,250  $5,190   11.0%
Processing  1,519   2,909   (1,390)  (47.8%)
Gross Revenue $53,959  $50,159  $3,800   7.6%
                 
Volume of Sales (gallons)                
  Petrochemical Products  22,353   20,665   1,688   8.2%
  Prime Product Sales  16,681   15,818   863   5.5%
                 
  Cost of Sales $43,424  $41,531  $1,893   4.6%
  Gross Margin  19.5%  17.2%  2.3%  13.5%
  Total Operating Expense**  15,040   16,686   (1,646)  (9.9%)
  Natural Gas Expense**  1,106   992   114   11.5%
  Operating Labor Costs**  4,412   4,084   328   8.0%
  Transportation Costs**  6,051   6,701   (650)  (9.7%)
  General & Administrative Expense  2,595   2,105   490   23.3%
  Depreciation and Amortization*  1,584   1,447   137   9.5%
  Capital Expenditures $9,426  $5,411  $4,015   74.2%

24




  2018
 2017
 Change
 % Change
  (thousands of dollars)
Petrochemical Product Sales $56,135
 $50,508
 $5,627
 11.1 %
Processing 1,685
 2,071
 (386) (18.6)%
Gross Revenue $57,820
 $52,579
 $5,241
 10.0 %
         
Volume of Sales (gallons)        
Petrochemical Products 19,733
 20,835
 (1,102) (5.3)%
Prime Product Sales 16,092
 16,294
 (202) (1.2)%
         
Cost of Sales $50,738
 $42,571
 $8,167
 19.2 %
Gross Margin 12.2% 19.0% 

 (6.8)%
Total Operating Expense** 17,081
 15,152
 1,929
 12.7 %
Natural Gas Expense** 1,328
 1,355
 (27) (2.0)%
Operating Labor Costs** 4,755
 4,033
 722
 17.9 %
Transportation Costs** 7,082
 6,567
 515
 7.8 %
General & Administrative Expense 2,480
 2,623
 (143) (5.5)%
Depreciation and Amortization* 1,655
 1,544
 111
 7.2 %
Capital Expenditures $3,529
 $9,021
 $(5,492) (60.9)%
*Includes $1,378$1,494 and $1,291$1,376 for 20172018 and 2016,2017, respectively, which is included in operating expense
** Included in cost of sales

Gross Revenue

Gross Revenue for our Specialty Petrochemical segment increased during thirdsecond quarter 2018 from second quarter 2017 from third quarter 2016 by 7.6%10.0% primarily due to an increase in the average selling price of 1.6% and volume of 8.2%17.0%, partially offset by a 18.6% decrease in processing revenue.

Petrochemical Product Sales

Petrochemical product sales increased by 11.0%11.1% during thirdsecond quarter 20172018 from thirdsecond quarter 20162017 due to an increase in the the average selling price of 1.6%17.0%, which was partially offset by 5.3% decline in petrochemical sales volume due to lower sales of by-products.  Prime product sales volume were flat as compared to second quarter 2017.  Prime product sales in the second quarter were negatively affected by operating issues at some customers. Average selling price increased as prices for both prime products and an increase in volume soldby-products increased to offset higher feedstock cost which were up 34% from the second quarter of 8.2%.2017.  It should be noted that by-product are produced as result of prime product production and their margins are significantly lower than margins for our prime products.  Our average selling price increased because offor two
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23

reasons.  First, by-product selling prices were significantly higher in the thirdsecond quarter of 20172018 compared to the thirdsecond quarter of 2016;2017; 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 higher in third quarter 2017 as compared to third quarter 2016.  Prime 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, our 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 mainly due to higher values for certain components in the by-products.  Foreign sales volume decreased to 17.3%21.5% of total petrochemical volume from 25.7%22.1% in thirdsecond quarter 2016.2017.

Processing

Processing revenues decreased 47.8% during thirddeclined 18.6% in second quarter 2018 from second quarter 2017 from 2016primarily due to reduced production for a decrease in reimbursements fromspecific customer as a processing customer.result of unit downtime for inspection work and related repairs.

Cost of Sales

Cost of Sales increased 4.6%19.2% during thirdsecond quarter 20172018 from 20162017 primarily due to the increase in feedstock cost and volume.higher operating expenses at our Silsbee plant.  Our average feedstock cost per gallon increased 3.2%34% over thirdsecond quarter 20162017 primarily due to an approximately 13%44% increase in the benchmark price of Mont Belvieu natural gasoline, which was partially offset by lower penalty payments and other delivery costs.gasoline.  Our average feedstock cost per gallon for the second quarter 2018 increased 9.4% from the first quarter of 2018. Furthermore during the second quarter feedstock cost per gallon continued to steadily increase month to month. The increase in feedstock costs compressed margins for prime products. We sell our prime products under both formula-based pricing where feedstock costs are passed through to

25




the customer and spot or non-formula-based pricing which do not have pricing formulas tied to feedstock costs.  Formula-based pricing is used to sell the majority of our prime products and typically has a 30 day trailing feed cost basis. This has an unfavorable impact on margins when feedstock prices are rising as we experienced in the quarter. The increase in feedstock costs also compressed margins for the spot, or non-formula, portion of prime product sales. These areWe saw sequential improvement in prime product margins compared to first quarter 2018 as a result of increased prices and better 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.mix.
Volume processed increased 7.1% over third 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 first quarter 2018 to enable us to convert the less valuable components in our feed into higher value products, thereby allowing us to sell our byproductsby-products at higher prices.

The contract pricing formulas useddecrease in gross margin percentage from 19.0% to sell the majority of12.2% was due to higher feedstock costs resulting in margin compression for 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. as well as higher plant operating expenses.

Total Operating Expense

Total Operating Expense decreased 9.9%increased 12.7% during thirdsecond quarter 20172018 from 2016.2017.  Natural gas, labor, and transportation are the largest individual expenses in this category; however, not all of these decreased.

category. The cost of natural gas purchased increased 11.5% duringmain drivers for the increase in operating expenses were labor costs and transportation costs. Labor costs were up 17.9% in second quarter 2018 from 2017 from 2016primarily due to higher per unit costovertime, training and an increase in volume consumed.  The average price per MMBTU for third quarter 2017 was $3.22 whereas, for 2016 the per-unit cost was $2.93.  Volume increased slightly to approximately 337,000 MMBTU from about 331,000 MMBTU.  However, volume was down from second quarter 2017 which consumed approximately 417,000 MMBTU.  The reduction in consumption sequentially was due to downtimecontract labor associated with the hurricane.

Laborstart-up of the Advanced Reformer unit. We estimate the additional non-recurring cost associated with the start-up of the Advanced Reformer to be approximately $1 million. Transportation costs were higher by 8.0% during 2017 from 2016 primarily due to additional expenses associated with the storm.
Transportation costs were lower by 9.7% primarily due to a decrease in the number of isocontainers and railcars which were shipped.  Isocontainers 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 third quarter 2017 increased from 2016 by 23.3%7.8% primarily due to an increase in our property tax accrual becausethird party freight costs associated with governmental mandates which took effect in the first quarter of 2018, and an increase in the expirationcost of abatements.  Group insurance and administrative labor costs also increased.

Depreciation

Depreciation increased 9.5% during third quarter 2017 from 2016 primarilyrail freight due to 2016 capital expenditures increasing our depreciable base.
higher shipment volume, higher rail car storage cost at a third-party rail yard as well as higher freight rates.

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24

Capital Expenditures

Capital Expenditures increased 74.2% during thirdin the second quarter 2018 were approximately $3.5 million compared to $9.0 million in the second quarter 2017 from 2016 primarily due toreflecting the newcompletion of the 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%)
  2018
 2017
 Change
 % Change
  (thousands of dollars)
Product Sales $7,434
 $6,508
 $926
 14.2 %
Processing 2,852
 3,028
 (176) (5.8)%
Gross Revenue $10,286
 $9,536
 $750
 7.9 %
         
Volume of wax sales (thousand pounds) 10,544
 9,581
 963
 10.1 %
         
Cost of Sales $9,225
 $8,437
 $788
 9.3 %
Gross Margin 10.3% 11.5% 

 (1.2)%
General & Administrative Expense 1,239
 1,275
 (36) (2.8)%
Depreciation and Amortization* 1,365
 1,008
 357
 35.4 %
Capital Expenditures $877
 $4,931
 $(4,054) (82.2)%
*Includes $1,187$1,343 and $1,082$987 for 20172018 and 2016,2017, respectively, which is included in cost of sales

Product Sales

Product sales revenue increased 14.9%14.2% during thirdsecond quarter 2018 from second quarter 2017 from third quarter 2016 as we continued to see strong growth in wax sales both domestically and in export.  Polyethylene waxvolume increased 10.1%. Wax sales remained steady during the quarter.  However, volumes of our traditional products were impactedconstrained by the storm due to outages atsupply issues for our wax feed suppliers.  Weas well as supply of third party waxes that we distribute in Latin America. Wax sales continue to make progress in growingbe limited by supply constraints as opposed to market demand. Our average wax selling price increased 4.4% reflecting our marketing strategy to enhance pricing and improve sales inmix.  Customer demand continues

26




to be strong for our newhigher value waxes including our products for ourthe 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%declined 5.8% during thirdsecond quarter 2018 from second quarter 2017 from third quarter 2016 primarilyas we weren't able to fully meet customer needs due to the impact of the hurricane.  The entire facility was downplant operating issues. B Plant revenues in second quarter 2018 were about $0.8 million. We believe there are significant opportunities for a full week during the storm,improving our operational efficiency and when you are selling time, it means zerocustomer demand for our 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 willcapabilities continues to be starting up shortly and running on a high value project through the end of the year.strong.

Cost of Sales

Cost of Sales increased 22.5%9.3% during thirdsecond quarter 20172018 from thirdsecond quarter 20162017 primarily due to increases inhigher plant operating expenses including higher costs for labor, freight, equipment maintenance, storage 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%35.4% during thirdsecond quarter 20172018 from 20162017 primarily due to the hydrogenation/distillation unit coming online.


Tableonline in the second and third quarters of Contents
25


2017.

Capital Expenditures

Capital Expenditures decreased 51.0%82.2% during thirdsecond quarter 20172018 from thirdsecond quarter 20162017 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%)
  2018
 2017
 Change
 % Change
  (in thousands)  
General & Administrative Expense $834
 $1,842
 $(1,008) (54.7)%
Equity in earnings (losses) of AMAK 228
 (3,298) 3,526
 106.9 %

General and Administrative Expenses

General corporate expenses increaseddecreased during thirdsecond quarter 20172018 from thirdsecond quarter 20162017. The decrease is primarily due to an increase in officer compensation. Officer compensation increased dueattributable to the accrual for 2017 executive bonusescancellation and the reversal of certain accrued expensesstock compensation expense and other post retirement benefits awarded to Mr. Hatem El Khalidi. See further discussion in the third quarter of 2016, including the accrual for bonuses when it was determined they would not be awarded.Note 13 and 19.

Equity in LossesEarnings (Losses) of AMAK

Equity in lossesearnings (losses) of AMAK decreasedincreased during thirdsecond quarter 20172018 from thirdsecond 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.2017.


27




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 

  Three Months Ended
June 30,
  2018
 2017
  (thousands of dollars)
Sales $19,494
 $
Cost of sales 16,555
 8,901
Gross income (loss) $2,939
 $(8,901)
General, administrative and other expenses 3,265
 (1,971)
Net income (loss) $(326) $(10,872)
Depreciation and amortization 8,281
 7,609
Net income (loss) before depreciation and amortization $7,955
 $(3,263)

AMAK continuescontinued to upgrade leadership and personnel at the site while filling all significant personnel vacancies.  Sixteen percent more copper concentrate was shipped to the portmake progress 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 liferecoveries. Approximately 14,000 dry metric tons (dmt) of the copper and zinc mine assets are anticipated later this year.concentrate were shipped in second quarter 2018 as compared to no shipments of copper and zinc concentrate in second quarter 2017. This is an approximately 40% increase in shipments compared to first quarter 2018.



TableComparison of Contents
Six Months Ended 26June 30, 2018

and 2017


Comparison of Nine Months Ended September 30, 2017 and 2016

Specialty Petrochemical Segment

  2018
 2017
 Change
 % Change
  (thousands of dollars)
Petrochemical Product Sales 116,420
 94,899
 21,521
 22.7 %
Processing 3,713
 3,559
 154
 4.3 %
Gross Revenue 120,133
 98,458
 21,675
 22.0 %
         
Volume of Sales (gallons)        
Petrochemical Products 43,022
 38,159
 4,863
 12.7 %
Prime Product Sales 33,742
 30,186
 3,556
 11.8 %
         
Cost of Sales 103,387
 78,929
 24,458
 31.0 %
Gross Margin 13.9% 19.8%   (5.9)%
Total Operating Expense** 32,924
 28,121
 4,803
 17.1 %
Natural Gas Expense** 2,576
 2,439
 137
 5.6 %
Operating Labor Costs** 8,514
 7,276
 1,238
 17.0 %
Transportation Costs** 14,402
 12,263
 2,139
 17.4 %
General & Administrative Expense 5,300
 5,319
 (19) (0.4)%
Depreciation and Amortization* 3,369
 3,100
 269
 8.7 %
Capital Expenditures 13,812
 17,777
 (3,965) (22.3)%
  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$3,042 and $3,743$2,452 for 20172018 and 2016,2017, respectively, which is included in operating expense
** Included in cost of sales

Gross Revenue

Gross Revenue for our Specialty Petrochemical segment increased during the first nine monthshalf of 2018 from the first half of 2017 from 2016 by approximately 12.2%22.0% primarily due to an increase in the volume of 12.7%, an increase in the average selling price of 9.4%8.7% and an increase in volumeprocessing revenue of 4.3% offset by a decrease in processing fees..

Petrochemical Product Sales

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Petrochemical product sales revenue increased by 14.1%22.7% during the first nine monthshalf of 2018 from the first half of 2017 from 2016 due to an increase in the volume sold of 12.7% and an increase in the average selling price of 9.4% and an8.7%.  Prime product volume increased 11.8% in the first half of 2018 as compared to the first half of 2017. Prime products sales volume in 2018 benefited from strong sales in the first quarter of 2018 while second quarter 2018 prime product sales were flat from second quarter 2017. Due to the need to produce additional prime products to support the increase in sales volume, of 4.3%.our by-product volume increased 16% from 2017.  By-product margins in 2018 were about flat compared with 2017. It should be noted that by-product margins are significantly lower than margins for our prime products. Our average selling price increased becausefor two reasons.  First, by-product selling prices were significantly higher in the first half of higher prices for prime products2018 compared to the first half of 2017; and by-products, driven by higher feedstock costs.  Asecond, 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.  NGLFeedstock prices were relatively stable duringabout 23% higher in the first nine monthshalf of 2017 but were significantly higher than2018 as compared to the first nine monthshalf of 2016.2017.  Foreign sales volume decreasedincreased to 19.6%23% of total petrochemical volume from 22.7%21% in the first nine monthshalf of 2016.2017.

Processing

Processing revenues decreased 25.0%increased 4.3% during the first nine monthshalf of 20172018 from 20162017 due to reduced fees associated withsome improvement in volumes processed and first step processing for 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.project that was completed at TC.

Cost of Sales

Our Cost of Sales increased 14.3%31.0% during the first nine monthshalf of 2018 from 2017 from 2016primarily due to the increase in NGL pricesfeedstock cost and volume as mentioned above.well as higher operating expenses.  Our average feedstock cost per gallon increased 17.6%;23% compared to the first half of 2017 primarily due to an approximately 35% increase in the benchmark price of Mont Belvieu natural gasoline, which was partially offset by lower shortfall fees and other delivery costs. 

During the first half of 2018, feedstock cost per gallon increased steadily month to month whereas volume processed remained steady.  in the first half of 2017 feedstock costs were declining. The increase in feedstock costs compressed margins for prime products. We sell our prime products under both formula-based pricing where feedstock costs are passed through to the customer and spot or non-formula-based pricing which do not have pricing formulas tied to feedstock costs.  Formula-based pricing is used to sell the majority of our prime products and typically has a 30 day trailing feed cost basis. This has an unfavorable impact on margins when feedstock prices are rising as we experienced in the first half of 2018. The increase in feedstock costs compressed margins for the spot or non-formula portion of prime product sales.

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%.  OurWe expect our advanced reformer unit (due online in first quarter 2018) will allowto enable us to convert many of the by-productsless valuable components in our feed into higher value products, thereby allowing us to sell our byproductsby-products at higher prices.


The decrease in gross margin from 19.8% to 13.9% was due to higher feedstock costs resulting in margin compression for our prime products as well as higher plant operating expenses.
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Total Operating Expense

Total Operating Expense decreased 0.8%increased 17.1% during the first nine monthshalf of 20172018 from 2016.  Natural2017.  Labor, transportation and 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.

category. Labor costs were lowerhigher by 1.7%17.0% in the first half of 2018 from 2017. Labor costs were higher primarily due to maintenanceovertime, training and contract labor being capitalizedassociated with the start-up of the Advanced Reformer unit. We estimate the additional non-recurring cost associated with the start-up of the Advanced Reformer to construction in progress.

be approximately $1 million. Transportation costs were higher by 2.6%17.4% primarily due to an increase in the number of isocontainer shipments duringthird party freight costs associated with governmental mandates which took effect in the first nine monthsquarter of 2017.  These shipments increased 112.6%2018, 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 becausethe cost of the expiration of abatements.  Group insurance and administrative labor costs also increased.rail freight due to higher shipment volume, higher rail car storage cost at a third-party rail yard as well as higher freight rates.

Depreciation

Depreciation increased 11.2%8.7% during the first nine monthshalf of 20172018 from 2016 primarily due to 2016 capital expenditures increasing our depreciable base.2017.

Capital Expenditures


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Capital Expenditures increased 61.8%decreased 22.3% during the first nine monthshalf of 20172018 from 20162017 primarily due to expenditures related to construction ofthe decline in capital spending for 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 we now expect the advanced reformer unit to come online toward the end of first quarter 2018.project which was recently completed. See additional detail above under "Investing Activities". 


Specialty Wax Segment

  2017  2016  Change  %Change 
  (thousands of dollars) 
Product Sales $18,606  $14,585  $4,021   27.6%
Processing  8,142   7,766   376   4.8%
Gross Revenue $26,748  $22,351  $4,397   19.7%
                 
   Volume of wax sales (thousand pounds)  28,281   24,126   4,155   17.2%
                 
  Cost of Sales $25,219  $18,880  $6,339   33.6%
  Gross Margin  5.7%  15.5%  (9.8%)  (63.2%)
  General & Administrative Expense  3,729   3,582   147   4.1%
  Depreciation and Amortization*  3,233   2,945   288   9.8%
  Capital Expenditures $12,047  $11,059  $988   8.9%
  2018
 2017
 Change
 % Change
  (thousands of dollars)
Product Sales $13,817
 $13,016
 $801
 6.2 %
Processing 6,064
 6,183
 (119) (1.9)%
Gross Revenue 19,881
 19,199
 682
 3.6 %
         
Volume of wax sales (thousand pounds) 20,085
 20,245
 (160) (0.8)%
         
Cost of Sales $18,344
 $17,003
 $1,341
 7.9 %
Gross Margin 7.7% 11.4%   (3.7)%
General & Administrative Expense 2,607
 2,622
 (15) (0.6)%
Depreciation and Amortization* 2,669
 2,024
 645
 31.9 %
Capital Expenditures $1,622
 $10,056
 $(8,434) (83.9)%
*Includes $3,169$2,625 and $2,877$1,795 for 20172018 and 2016,2017, respectively, which is included in cost of sales

Product Sales

Product sales revenue increased 27.6%6.2% during the first nine monthshalf of 20172018 from the first nine monthshalf of 2016 primarily due to on-purpose PE2017 as average wax sales whichprice increased approximately 8% while sales volumes were essentially flat. In 2018, wax sales continued to be constrained by supply issues on third party waxes that we are distributingdistribute in Latin America and also by limited wax feed supply to our plant. Selling prices for a third party as well as, significantwax benefited from our marketing strategy to enhance pricing and improve sales mix.  Responding to customer demand, we sold record volumes of our higher value waxes including our products for the Hot Melt Adhesives ("HMA") and PVC Lubricant markets.   These products are characterized by generally higher margins and growth in 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.rates.
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Processing

Processing revenues increased 4.8%decreased 1.9% during the first nine monthshalf of 20172018 from the first nine monthshalf of 2016 due2017. In the first half of 2018, we made progress in correcting operational issues however the plant continued to increased volumesstruggle with existing customersconsistently and a number of new contractsreliably operating the hydrogenation and small trials.  Processing revenue generated fromdistillation unit.  B Plant was approximately $2.2 million, from the new distillation unit was approximately $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 timerevenues in the first quarterhalf of 2016, custom processing revenues2018 were up over 32% over 2016 numbers. This revenue increase occurred despite the start-up difficulties with the hydrogenation unit resultingabout $2.14 million, a record level since we acquired it in negligible processing revenues from that unit.  Further, faulty equipment in another unit caused an extended shutdown of this unit resulting in further loss of revenue.mid-2016.  We believe significant opportunities for improving our operational efficiencies remain.

Cost of Sales

Cost of Sales increased 33.6%7.9% during the first nine monthshalf of 20172018 from the first nine monthshalf of 20162017 primarily due to increases in material cost,operations labor, freight, repairsequipment maintenance, storage and maintenance of manufacturing equipment, and natural gas utilities.

Material cost increased approximately 69.4% due to material costs associated with the on-purpose PE wax sales we distributed into Latin America as noted above and to support the additional sales volume of polyethylene wax sales.  Labor increased approximately 22.8% due to increased overtime and the addition of new personnel in preparation for the start-up of the new hydrogenation/distillation project.  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 addition of B Plant and the introduction of new custom processing projects.  Natural gas utilities increased approximately 84.4% due to an increase in 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 fordecreased 0.6% during the first nine monthshalf of 20172018 from 2016 increased 4.1% primarily due to an increase in sales personnel, property taxes, and property insurance due to the addition of B Plant.2017.

Depreciation

Depreciation increased 9.8%31.9% during the first nine monthshalf of 20172018 from 20162017 primarily due to addition of B Plant.the hydrogenation/distillation unit coming online.

Capital Expenditures

Capital Expenditures increased 8.9%decreased 83.9% during the first nine monthshalf of 20172018 from the first nine monthshalf of 20162017 primarily due to expenditures for construction in progress includingthe completion of the hydrogenation/distillation project which came online in the second 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.third quarters of 2017.

Corporate Segment
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  2017  2016  Change  %Change 
  (thousands of dollars)    
General & Administrative Expense $5,978  $5,128  $850   16.6%
Equity in earnings (losses) of AMAK  (5,161)  2,261   (7,422)  (328.3%)
Gain from additional equity issuance by AMAK  -   3,168   (3,168)  (100.0%)


Corporate Segment

  2018
 2017
 Change
 % Change
  (in thousands)  
General & Administrative Expense $2,982
 $4,020
 $(1,038) (25.8)%
Equity in earnings (losses) of AMAK 458
 (4,264) 4,722
 110.7 %

General and Administrative Expenses

General corporate expenses increased 16.6%decreased during the first nine months 2017half of 2018 from the first nine months 2016half of 2017. The decrease is primarily dueattributable to an increasethe cancellation and reversal of stock compensation expense and other post retirement benefits awarded to Mr. Hatem El Khalidi. See further discussion in officer compensation.  Officer compensation increased because of the accrual in 2017 for executive bonuses. During 2016 we reversed the accrual for bonuses when it was determined they would not be awarded.Note 13 and 19.

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

Equity in earnings (losses) of AMAK decreasedincreased during the first nine months 2017half of 2018 from the first nine months 2016 primarily due to the recognition in 2016half 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 2017 (please see Note
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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.2017.

AMAK Summarized Income Statement

  
Nine Months Ended
September 30,
 
  2017  2016 
  (thousands of dollars) 
Sales $11,965  $9,921 
         
Gross loss  (11,515)  (7,556)
General, administrative and other expenses  6,942   6,986 
Loss from operations  (18,457)  (14,542)
Gain on settlement with former operator  -   17,440 
Net income (loss) $(18,457) $2,898 
  Six Months Ended
June 30,
  2018
 2017
  (thousands of dollars)
Sales $33,581
 $2,256
Cost of sales 29,061
 12,463
Gross income (loss) $4,520
 $(10,207)
General, administrative and other expenses 5,166
 4,559
Net loss $(646) $(14,766)
Depreciation and amortization 15,982
 10,664
Net income (loss) before depreciation and amortization $15,336
 $(4,102)

The team at AMAK continued to upgrade personnel and work on improving operations throughout the quarter.  Shipmentsmade significant progress in 2018 in terms of throughput rates, concentrate to the port continue to show steady improvement – along with quality and recoveries.  We reported on initial Guyan exploration results.  Exploration continues both at Guyan and the surrounding areas with a similar geological profile.  Exploration results which should extend the lifeApproximately 24,000 dry metric tons (dmt) of the copper and zinc mine assets are expected later this year.concentrate were shipped in the first half of 2018 as compared to no shipments of copper and zinc concentrate in the first half of 2017. 

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

As discussed in Note 19 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 withbelieve, based on our analysis, the actual value of plant and equipment on the ground should act in concert to minimizeexceeds any exposure arising fromrelated to the corporate guarantee.

On July 8, 2018, the SIDF loan was amended to adjust the repayment schedule and extend the repayment terms through April 2024. Under the new payment terms the current amount due to SIDF in 2019 is $8,000,000. The total amount outstanding to the SIDF at SeptemberJune 30, 2017,2018, was 305.0 million Saudi Riyals (US$81.3 million).

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Contractual Obligations

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 and a third amendment on July 25, 2017.  Refer to Note 10 on page 11 of this Form 10-Q for a detailed discussion.

Our contractual obligations are summarized in  Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations," in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017. Other than our obligations under the Amended and Restated Credit Agreement, there have been no material changes to the contractual obligation amounts disclosed in our annual report on Form 10-K for the fiscal year ended December 31, 2017.

On July 31, 2018, TOCCO and the Guarantors entered into a Fourth Amendment to the Amended and Restated Credit Agreement. See Note 20 of the 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 marketnet realizable value for SHR.  For TC, inventory is recorded at the lower of cost or marketnet realizable value 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, 2016.2017. 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
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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 5.2017.

Recent and New Accounting Standards

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Derivative Instrument Risk

Refer toSee Note 12 on page 13 of this Form 10-Q.to the Consolidated Financial Statements.

Interest Rate Risk
 
Refer toSee Note 12 on page 13 of this Form 10-Q.to the Consolidated Financial Statements.

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, 2016.2017.

ITEM 4. CONTROLS AND PROCEDURES.


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(a)
Evaluation of disclosure controls and procedures. Our chief executive officerChief Executive Officer and chief financial officer,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.report.
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

During second quarter 2017 we developed and implemented a 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.  Since, we have not completed the testing and evaluation of the operating effectiveness of controls, the previously disclosed material weaknesses 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 year, we expect to conclude that the material weaknesses have been remediated.
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(b)
Changes in internal control. Other than the efforts discussed immediately above in "Remediation of Material Weakness in Internal Control over Financial Reporting", there wasThere were  no changesignificant changes in our internal control over financial reporting that occurred during the quartersix months ended SeptemberJune 30, 2017,2018, that hashave materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

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

ITEM 1A. RISK FACTORS.

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, 2016.2017.


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ITEM 6. EXHIBITS.

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

Exhibit
Number
Description
10(a)3.1
3.2
10.1
Fourth Amendment to Amended and Restated Credit Agreement, dated as of July 25, 2017,31, 2018, among Texas Oil & Chemical Co. II, Inc. and, as Borrower, certain subsidiaries of the Borrower, as Guarantors, the Lenders from time to time party thereto, Citibank, N.A., as an L/C Issuer, 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 July 27, 2017 (file No. 001-33926))Administrative Agent, Swingline Lender and L/C Issuer
10.2*+FormRetirement Agreement, dated as of June 7, 2018, between Trecora Resources Stock and Incentive Plan Restricted Stock Unit AgreementConnie J. Cook
10.3*+FormConsulting Agreement, dated as of July 1, 2018, between Trecora Resources Stock and Incentive Plan Amended and Restated Restricted Stock Unit AgreementConnie J. Cook
31.1**Certification of Chief Executive Officer pursuant to Rule 13A-14(A) of the  Securities Exchange Act of 1934
31.2**Certification of Chief Financial Officer pursuant to Rule 13A-14(A) of the  Securities Exchange Act of 1934
32.1**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
32.2**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.INS*XBRL Instance Document
101.SCH*XBRL Taxonomy Schema Document
101.CAL*XBRL Taxonomy Calculation Linkbase Document
101.LAB*XBRL Taxonomy Label Linkbase Document
101.PRE*XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF*XBRL Taxonomy Extension Definition Linkbase Document



35

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SIGNATURES


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



DATE:  November 8, 2017   August 6, 2018   TRECORA RESOURCES
                                                (Registrant)


By: /s//s/Sami Ahmad
Sami Ahmad
                                                 ChiefPrincipal Financial Officer and Duly Authorized Officer


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