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 March 31,September 30, 2018
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:  (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 MayNovember 1, 2018: 24,322,625.
24,516,069.



TABLE OF CONTENTS

Item Number and Description
 
PART I – FINANCIAL INFORMATION
 
ITEM 1.   Financial Statements
 
 
Consolidated Balance Sheets
1
 
Consolidated Statements of Income
2
 
Consolidated Statement of Stockholders' Equity
3
 
Consolidated Statements of Cash Flows
4
 
Notes to Consolidated Financial Statements
5
   
ITEM 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations
19
20
   
ITEM 3.  Quantitative and Qualitative Disclosures About Market Risk
26
32
   
ITEM 4.   Controls and Procedures
26
33
 
 
PART II – OTHER INFORMATION
 
 
ITEM 1.  Legal Proceedings
26
34
   
ITEM 1A.  Risk Factors
26
34
   
ITEM 6.  Exhibits
27
35



PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS.

TRECORA RESOURCES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

  
MARCH 31,
2018
(unaudited)
  
DECEMBER 31,
2017
 
ASSETS
 (thousands of dollars) 
 Current Assets      
  Cash $2,568  $3,028 
  Trade receivables, net  27,421   25,779 
  Insurance receivable  742   -- 
  Inventories  15,691   18,450 
  Prepaid expenses and other assets  5,131   4,424 
  Taxes receivable  5,481   5,584 
          Total current assets  57,034   57,265 
         
  Plant, pipeline and equipment, net
  190,139   181,742 
         
  Goodwill  21,798   21,798 
  Intangible assets, net  20,343   20,808 
  Investment in AMAK  45,224   45,125 
  Mineral properties in the United States  588   588 
         
     TOTAL ASSETS $335,126  $327,326 
LIABILITIES
        
  Current Liabilities        
    Accounts payable $14,888  $18,347 
    Accrued liabilities  4,229   3,961 
    Current portion of post-retirement benefit  302   305 
    Current portion of long-term debt  8,061   8,061 
    Current portion of other liabilities  889   870 
          Total current liabilities  28,369   31,544 
         
  Long-term debt, net of current portion
  99,031   91,021 
  Post-retirement benefit, net of current portion
  897   897 
  Other liabilities, net of current portion
  1,374   1,611 
  Deferred income taxes  17,670   17,242 
     Total liabilities  147,341   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  56,422   56,012 
  Common stock in treasury, at cost  (184)  (196)
  Retained earnings  128,807   126,455 
  Total Trecora Resources Stockholders' Equity  187,496   184,722 
  Noncontrolling Interest  289   289 
   Total equity  187,785   185,011 
         
     TOTAL LIABILITIES AND EQUITY $335,126  $327,326 
See notes to consolidated financial statements.

TRECORA RESOURCES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)


  THREE MONTHS ENDED 
  MARCH 31, 
  2018  2017 
  (thousands of dollars) 
REVENUES      
  Petrochemical and Product Sales $66,699  $50,899 
  Processing Fees  5,042   4,643 
   71,741   55,542 
         
OPERATING COSTS AND EXPENSES        
  Cost of  Sales and Processing        
    (including depreciation and amortization of  $2,830 and $2,383,  respectively)  61,601   44,924 
         
   GROSS PROFIT  10,140   10,618 
         
GENERAL AND ADMINISTRATIVE EXPENSES        
  General and Administrative  6,335   6,221 
  Depreciation  196   205 
   6,531   6,426 
         
OPERATING INCOME  3,609   4,192 
         
OTHER INCOME (EXPENSE)        
  Interest Income  7   2 
  Interest Expense  (878)  (636)
  Equity in Earnings (Losses) of AMAK  230   (966)
  Miscellaneous Expense  (26)  (44)
   (667)  (1,644)
         
  INCOME BEFORE INCOME TAXES  2,942   2,548 
         
  INCOME TAXES  590   1,061 
         
  NET INCOME  2,352   1,487 
         
 NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST  --   -- 
         
 NET INCOME ATTRIBUTABLE TO TRECORA RESOURCES $2,352  $1,487 
         
Basic Earnings per Common Share        
  Net Income Attributable to Trecora Resources (dollars) $0.10  $0.06 
         
  Basic Weighted Average Number of Common Shares Outstanding  24,343   24,240 
         
Diluted Earnings per Common Share        
  Net Income Attributable to Trecora Resources (dollars) $0.09  $0.06 
         
  Diluted Weighted Average Number of Common Shares Outstanding  25,231   25,054 

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, 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 
Restricted Stock Units                                
  Issued to Directors  -   -   93   -   -   93   -   93 
  Issued to Employees  -   -   349   -   -   349   -   349 
Common Stock                                
  Issued to Directors  -   -   (63)  24   -   (39)  -   (39)
  Issued to Employees  -   -   (39)  44   -   5   -   5 
  Stock Exchange (see Notes 8 & 16)  -   -   (65)  (65)  -   (130)  -   (130)
Warrants  -   -   (9)  9   -   -   -   - 
Net Income  -   -   -   -   2,352   2,352   -   2,352 
                                 
MARCH 31, 2018  24,311  $2,451  $56,422  $(184) $128,807  $187,496  $289  $187,785 

  September 30,
2018
(Unaudited)		 December 31,
2017
ASSETS (thousands of dollars, except par value)
  Current Assets
    
Cash $1,292
 $3,028
Trade receivables, net 29,787
 25,779
Insurance receivable 391
 —
Inventories 17,828
 18,450
Prepaid expenses and other assets 5,466
 4,424
Taxes receivable 1,554
 5,584
Total current assets 56,318
 57,265
     
  Plant, pipeline and equipment, net
 192,311
 181,742
     
Goodwill 21,798
 21,798
Intangible assets, net 19,412
 20,808
Investment in AMAK 44,322
 45,125
Mineral properties in the United States 588
 588
     
TOTAL ASSETS $334,749
 $327,326
LIABILITIES    
Current Liabilities    
Accounts payable $13,311
 $18,347
Accrued liabilities 6,018
 3,961
Current portion of post-retirement benefit 24
 305
Current portion of long-term debt 4,194
 8,061
Current portion of other liabilities 835
 870
Total current liabilities 24,382
 31,544
     
  Long-term debt, net of current portion
 101,337
 91,021
  Post-retirement benefit, net of current portion
 361
 897
  Other liabilities, net of current portion
 1,170
 1,611
Deferred income taxes 18,218
 17,242
Total liabilities 145,468
 142,315
     
EQUITY    
  Common stock‑authorized 40 million shares of $0.10 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 57,147
 56,012
Common stock in treasury, at cost (19) (196)
Retained earnings 129,413
 126,455
Total Trecora Resources Stockholders' Equity 188,992
 184,722
Noncontrolling Interest 289
 289
Total equity 189,281
 185,011
     
TOTAL LIABILITIES AND EQUITY $334,749
 $327,326

See notes to consolidated financial statements.

Table of Contents
3
Table of Contents
1



TRECORA RESOURCES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWSINCOME (UNAUDITED)

  THREE MONTHS ENDED 
  MARCH 31, 
  2018  2017 
  (thousands of dollars) 
OPERATING ACTIVITIES      
  Net Income $2,352  $1,487 
  Adjustments to Reconcile Net Income        
    To Net Cash Provided by Operating Activities:        
    Depreciation and Amortization  2,561   2,123 
    Amortization of Intangible Assets  465   465 
    Unrealized Gain on Derivative Instruments  -   (24)
    Share-based Compensation  592   633 
    Deferred Income Taxes  428   1,178 
    Postretirement Obligation  (3)  (2)
    Equity in (Earnings) Losses of AMAK  (230)  966 
    Bad Debt Expense  128   - 
    Amortization of Loan Fees  93   68 
  Changes in Operating Assets and Liabilities:        
    Increase in Trade Receivables  (1,770)  (2,056)
    Increase in Insurance Receivables  (742)  - 
    (Increase) Decrease in Taxes Receivable  102   (160)
    Decrease in Inventories  2,759   2,914 
    (Increase) Decrease in Prepaid Expenses and Other Assets  (803)  79 
    Increase (Decrease) in Accounts Payable and Accrued Liabilities  (3,190)  989 
    Increase (Decrease) in Other Liabilities  (7)  70 
    Net Cash Provided by Operating Activities  2,735   8,730 
         
INVESTING ACTIVITIES        
  Additions to Plant, Pipeline and Equipment  (11,028)  (13,881)
  Advances to AMAK, net  (44)  (26)
    Cash Used in Investing Activities  (11,072)  (13,907)
         
FINANCING ACTIVITIES        
  Payments Related to Tax Withholding for Stock-based Compensation  (40)  - 
  Addition to Long-Term Debt  10,000   5,000 
  Repayment of Long-Term Debt  (2,083)  (4,167)
    Net Cash Provided by Financing Activities  7,877   833 
         
NET DECREASE IN CASH  (460)  (4,344)
         
CASH AT BEGINNING OF PERIOD  3,028   8,389 
         
CASH AT END OF PERIOD $2,568  $4,045 

Supplemental disclosure of cash flow information:   
  Cash payments for interest $1,124  $936 
  Cash payments for taxes, net of refunds $-  $- 
Supplemental disclosure of non-cash items:        
  Capital expansion amortized to depreciation expense $210  $161 
  Stock exchange (Notes 8 & 16) $130  $- 

  THREE MONTHS ENDED
SEPTEMBER 30,		 NINE MONTHS ENDED
SEPTEMBER 30,
  2018 2017 2018 2017
  (thousands of dollars, except per share amounts)
REVENUES        
Petrochemical and Product Sales $68,613
 $58,030
 $198,881
 $165,945
Processing Fees 4,803
 3,478
 14,382
 13,220
  73,416
 61,508
 213,263
 179,165
         
OPERATING COSTS AND EXPENSES        
Cost of Sales and Processing        
(including depreciation and amortization of $3,813, $2,565, $9,480, and $7,311, respectively) 66,574
 51,638
 188,139
 147,570
         
    GROSS PROFIT
 6,842
 9,870
 25,124
 31,595
         
GENERAL AND ADMINISTRATIVE EXPENSES        
General and Administrative 6,327
 5,660
 17,216
 17,621
Depreciation 205
 245
 592
 655
  6,532
 5,905
 17,808
 18,276
         
OPERATING INCOME 310
 3,965
 7,316
 13,319
         
OTHER INCOME (EXPENSE)        
Interest Income 5
 —
 26
 —
Interest Expense (924) (795) (2,617) (2,109)
Loss on Extinguishment of Debt (315) —
 (315) —
Equity in Losses of AMAK (1,130) (897) (672) (5,161)
Miscellaneous Income (Expense) (28) 22
 (67) (42)
  (2,392) (1,670) (3,645) (7,312)
         
INCOME (LOSS) BEFORE INCOME TAXES (2,082) 2,295
 3,671
 6,007
         
INCOME TAX EXPENSE (BENEFIT) (473) 577
 713
 1,970
         
NET INCOME (LOSS) (1,609) 1,718
 2,958
 4,037
         
NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST —
 —
 —
 —
         
NET INCOME (LOSS) ATTRIBUTABLE TO TRECORA RESOURCES $(1,609) $1,718
 $2,958
 $4,037
         
Basic Earnings (Loss) per Common Share        
Net Income (Loss) Attributable to Trecora Resources (dollars) $(0.07) $0.07
 $0.12
 $0.17
         
Basic Weighted Average Number of Common Shares Outstanding 24,483
 24,304
 24,397
 24,267
         
Diluted Earnings (Loss) per Common Share        
Net Income (Loss) Attributable to Trecora Resources (dollars) $(0.06) $0.07
 $0.12
 $0.16
         
Diluted Weighted Average Number of Common Shares Outstanding 25,175
 25,157
 25,138
 25,082

See notes to consolidated financial statements.

Table of Contents
4
Table of Contents
2



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 —
 —
 250
 —
 —
 250
 —
 250
Issued to Employees —
 —
 1,284
 —
 —
 1,284
 —
 1,284
Common Stock                
Issued to Directors —
 —
 82
 78
 —
 160
 —
 160
Issued to Employees —
 —
 130
 155
 —
 285
 —
 285
Stock Exchange (see Notes 8 & 17) —
 —
 (66) (65) —
 (131) —
 (131)
Warrants —
 —
 (9) 9
 —
 —
 —
 —
Net Income —
 —
 —
 —
 2,958
 2,958
 —
 2,958
                 
September 30, 2018 24,311
 $2,451
 $57,147
 $(19) $129,413
 $188,992
 $289
 $189,281

See notes to consolidated financial statements.


Table of Contents
3



TRECORA RESOURCES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
  NINE MONTHS ENDED
SEPTEMBER 30,
  2018 2017
  (thousands of dollars)
OPERATING ACTIVITIES    
Net Income $2,958
 $4,037
Adjustments to Reconcile Net Income    
To Net Cash Provided by Operating Activities:    
Depreciation and Amortization 8,614
 6,570
Amortization of Intangible Assets 1,396
 1,396
Unrealized Gain on Derivative Instruments —
 (51)
Stock-based Compensation 1,002
 2,005
Deferred Income Taxes 975
 1,571
Postretirement Obligation (817) (8)
Equity in Losses of AMAK 672
 5,161
Bad Debt Expense 152
 —
Amortization of Loan Fees 216
 154
Loss on Extinguishment of Debt 315
 —
Changes in Operating Assets and Liabilities:    
Increase in Trade Receivables (4,160) (545)
Increase in Insurance Receivables (391) —
Decrease in Taxes Receivable 4,029
 218
Decrease in Inventories 622
 5,022
(Increase) Decrease in Prepaid Expenses and Other Assets (1,592) 387
(Decrease) Increase in Accounts Payable and Accrued Liabilities (2,977) 3,356
(Decrease) Increase in Other Liabilities 96
 281
Net Cash Provided by Operating Activities 11,110
 29,554
     
INVESTING ACTIVITIES    
Additions to Plant, Pipeline and Equipment (19,090) (39,250)
Advances to AMAK, net (114) (86)
Cash Used in Investing Activities (19,204) (39,336)
     
FINANCING ACTIVITIES    
Issuance of Common Stock —
 25
Net Cash Received (Paid) Related to Stock-Based Compensation 441
 (80)
Addition to Long-Term Debt 18,177
 14,000
Repayment of Long-Term Debt (12,260) (8,333)
Net Cash Provided by Financing Activities 6,358
 5,612
     
NET DECREASE IN CASH (1,736) (4,170)
     
CASH AT BEGINNING OF PERIOD 3,028
 8,389
     
CASH AT END OF PERIOD $1,292
 $4,219
Supplemental disclosure of cash flow information:  
Cash payments for interest $2,663
 $3,034
Cash payments for taxes, net of refunds $209
 $227
Supplemental disclosure of non-cash items:    
Capital expansion amortized to depreciation expense $573
 $642
Stock exchange (Notes 8 & 17) $131
 $—
See notes to consolidated financial statements.

Table of Contents
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, 2017.2017.

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 threenine months ended March 31,September 30, 2018 are not necessarily indicative of results for the year ending December 31, 2018.

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

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

Revenue Recognition

The Company adopted Financial Accounting Standards Board ("FASB") ASCAccounting Standards Codification ("ASC") Topic 606 ("ASC 606"),  Revenue from Contracts with Customers,and its amendments with a date of the initial application of January 1, 2018. As a result, the Company has changed its accounting policy for revenue recognition as detailed below.  ASC 606 outlines a single comprehensive model for an entity to use in 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, "RevenueRecognition", 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

Table of Contents
5



recognize revenue to depict the transfer of goods or services 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 Company 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 modified 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 threenine months ended March 31,September 30, 2017 the Company recognized revenue according to FASB ASC Topic 605 "Revenue Recognition", ("ASC 605"), when"Revenue Recognition", 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 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 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

Table of Contents
6



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.

Specialty Wax segment
The specialty wax segment of the 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.

2. RECENT ACCOUNTING PRONOUNCEMENTS

In May 2014, the Financial Accounting Standards Board ("FASB")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")ASC Topic 605,  Revenue Recognition and most industry-specific guidance throughout the Accounting Standards Codification,ASC, 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. The Company completed its assessment of the impact of the adoption of ASU 2014-09 across all revenue streams.  This included reviewing current accounting policies and practices to identify potential differences that would result from applying the requirements under the new standard.  We completed contract reviews and validated results of applying the new revenue guidance (Note 1). 

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 has established a project team to analyze ASU No. 2016-02 and is in the process of fully evaluating the amendments and will subsequently implement new processes. In addition, the Company will change itsreviewing current accounting policies and procedures to comply withidentify potential differences and changes which would result from applying the amendments with suchrequired new standard to it's lease contracts, and is developing and implementing appropriate changes to internal control processes and controls to support the accounting and disclosure requirements. The Company has identified the population of lease agreements, comprised primarily of railcar lease arrangements, as mentioned above.well as office space and equipment, and is assessing the impact of other arrangements for potential embedded leases.

In February 2018, the FASB issued ASU No. 2018-02,  Income Statement — Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. ASU 2018-02 was issued to 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)("TCJA") on December 22, 2017, which changed the Company's income

Table of Contents
7



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 total or in part using a full retrospective or modified retrospective method. The amendments of the ASU are effective for periods beginning after December 15, 2018. Early adoption is permitted. The Company believes there will be no material impact to the consolidated financial statements as a result of this update.

In June 2018, the FASB issued ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting. ASU 2018-07 simplifies the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees, with certain exceptions. The amendments in this ASU are effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. The Company is assessing the effect of ASU 2018-02 on its consolidated financial statements.



3. TRADE RECEIVABLES

Trade receivables, net, consisted of the following:

  March 31, 2018  December 31, 2017 
  (thousands of dollars) 
Trade receivables $27,849  $26,079 
Less allowance for doubtful accounts  (428)  (300)
    Trade receivables, net $27,421  $25,779 
  September 30, 2018
 December 31, 2017
  (thousands of dollars)
Trade receivables $30,239
 $26,079
Less allowance for doubtful accounts (452) (300)
Trade receivables, net $29,787
 $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:
  September 30, 2018
 December 31, 2017
  (thousands of dollars)
Prepaid license $2,217
 $1,919
Prepaid catalyst 620
 779
Prepaid insurance 26
 —
Spare parts 1,557
 954
Other prepaid expenses and assets 1,046
 772
Total $5,466
 $4,424

  March 31, 2018  December 31, 2017 
  (thousands of dollars) 
Prepaid license $1,919  $1,919 
Prepaid catalyst  723   779 
Prepaid insurance  92   - 
Spare parts  1,100   954 
Other prepaid expenses and assets  1,297   772 
    Total $5,131  $4,424 

5. INVENTORIES

Inventories included the following:

  March 31, 2018  December 31, 2017 
  (thousands of dollars) 
Raw material $2,612  $3,703 
Work in process  51   27 
Finished products  13,028   14,720 
    Total inventory $15,691  $18,450 
  September 30, 2018
 December 31, 2017
  (thousands of dollars)
Raw material $3,135
 $3,703
Work in process 164
 27
Finished products 14,529
 14,720
Total inventory $17,828
 $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 $4.0$4.5 million and $3.7 million at March 31,September 30, 2018, and December 31, 2017, respectively.



Table of Contents
8



6. PLANT, PIPELINE AND EQUIPMENT

Plant, pipeline and equipment consisted of the following:

  March 31, 2018  December 31, 2017 
  (thousands of dollars) 
Platinum catalyst metal $1,612  $1,612 
Land  5,428   5,428 
Plant, pipeline and equipment  188,529   186,946 
Construction in progress  60,441   50,996 
Total plant, pipeline and equipment  256,010   244,982 
  Less accumulated depreciation  (65,871)  (63,240)
Net plant, pipeline and equipment $190,139  $181,742 
  September 30, 2018
 December 31, 2017
  (thousands of dollars)
Platinum catalyst metal $1,612
 $1,612
Land 5,428
 5,428
Plant, pipeline and equipment 254,560
 186,946
Construction in progress 1,927
 50,996
Total plant, pipeline and equipment 263,527
 244,982
Less accumulated depreciation (71,216) (63,240)
Net plant, pipeline and equipment $192,311
 $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 $304,000$0 and $374,000$218,000 for the three and $731,000 and $878,000 for the nine months ended March 31,September 30, 2018 and 2017, respectively.

Labor capitalized for construction was approximately $1.2$0.1 million and $0.8 million for the three and $2.2 million and $2.4 million for the nine months ended March 31,September 30, 2018, and 2017, respectively.

Construction in progress during the first threenine months of 2018 included equipment purchased for various equipment updates at the TC facility; new reformer unit, tankage upgrades, and an addition to the rail spur at SHR. Construction in progress during the first nine months of 2017 included equipment purchased for the hydrogenation/distillation unit and updates to B Plan 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 $24,000 and $0 for the three and $24,000 and $25,000 for the threenine months ended March 31,September 30, 2018 and 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):class:
  September 30, 2018
  Gross 
Accumulated
Amortization
 Net
Intangible assets subject to amortization (Definite-lived) (thousands of dollars)
Customer relationships $16,852
 $(4,494) $12,358
Non-compete agreements 94
 (75) 19
Licenses and permits 1,471
 (469) 1,002
Developed technology 6,131
 (2,453) 3,678
  24,548
 (7,491) 17,057
Intangible assets not subject to amortization (Indefinite-lived)      
Emissions Allowance 197
 —
 197
Trade name 2,158
 —
 2,158
Total $26,903
 $(7,491) $19,412

  March 31, 2018 
 
Intangible assets subject to amortization (Definite-lived)
 Gross  
Accumulated
Amortization
  Net 
Customer relationships $16,852  $(3,932) $12,920 
Non-compete agreements  94   (66)  28 
Licenses and permits  1,471   (416)  1,055 
Developed technology  6,131   (2,146)  3,985 
   24,548   (6,560)  17,988 
Intangible assets not subject to amortization (Indefinite-lived)            
Emissions Allowance  197   -   197 
Trade name  2,158   -   2,158 
Total $26,903  $(6,560) $20,343 

  December 31, 2017 
 
Intangible assets subject to amortization (Definite-lived)
 Gross  
Accumulated
Amortization
  Net 
Customer relationships $16,852  $(3,651) $13,201 
Non-compete agreements  94   (61)  33 
Licenses and permits  1,471   (390)  1,081 
Developed technology  6,131   (1,993)  4,138 
   24,548   (6,095)  18,453 
Intangible assets not subject to amortization (Indefinite-lived)            
Emissions Allowance  197   -   197 
Trade name  2,158   -   2,158 
Total $26,903  $(6,095) $20,808 
Table of Contents
9



  December 31, 2017
  Gross 
Accumulated
Amortization
 Net
Intangible assets subject to amortization (Definite-lived) (thousands of dollars)
Customer relationships $16,852
 $(3,651) $13,201
Non-compete agreements 94
 (61) 33
Licenses and permits 1,471
 (390) 1,081
Developed technology 6,131
 (1,993) 4,138
  24,548
 (6,095) 18,453
Intangible assets not subject to amortization (Indefinite-lived)      
Emissions Allowance 197
 —
 197
Trade name 2,158
 —
 2,158
Total $26,903
 $(6,095) $20,808

Amortization expense for intangible assets included in cost of sales for the three months ended March 31,September 30, 2018 and 2017, was approximately $465,000 and $465,000,$466,000, respectively, and for the nine months ended September 30, 2018 and 2017, was approximately $1,396,000 and $1,396,000, respectively.

Based on identified intangible assets that are subject to amortization as of March 31,September 30, 2018, we expect future amortization expenses for each period to be as follows (in thousands):follows:

  
Total
  Remainder of 2018  
2019
  
2020
  2021  2022  2023  
Thereafter
 
Customer relationships $12,920  $843  $1,123  $1,123   1,123   1,123   1,123  $6,462 
Non-compete agreements  28   14   14   -   -   -   -   - 
Licenses and permits  1,055   79   106   106   101   86   86   491 
Developed technology  3,985   460   613   613   613   613   613   460 
Total future amortization expense $17,988  $1,396  $1,856  $1,842  $1,837  $1,822  $1,822  $7,413 

  Total
 Remainder of 2018
 2019
 2020
 2021
 2022
 2023
 Thereafter
  (thousands of dollars)
Customer relationships $12,358
 $281
 $1,123
 $1,123
 1,123
 1,123
 1,123
 $6,462
Non-compete agreements 19
 5
 14
 —
 —
 —
 —
 —
Licenses and permits 1,002
 26
 106
 106
 101
 86
 86
 491
Developed technology 3,678
 153
 613
 613
 613
 613
 613
 460
Total future amortization expense $17,057
 $465
 $1,856
 $1,842
 $1,837
 $1,822
 $1,822
 $7,413

9
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 months ended March 31,September 30, 2018 and 2017, respectively.

  
Three Months Ended
March 31, 2018
  
Three Months Ended
March 31, 2017
 
        Per Share        Per Share 
  Income  Shares  Amount  Income  Shares  Amount 
Basic Net Income per Share:                  
Net Income Attributable to Trecora Resources $2,352   24,343  $0.10  $1,487   24,240  $0.06 
                         
Unvested restricted stock units      403           321     
Dilutive stock options outstanding      485           493     
                         
Diluted Net Income per Share:                        
Net Income Attributable to Trecora Resources $2,352   25,231  $0.09  $1,487   25,054  $0.06 
  Three Months Ended
September 30, 2018		 Three Months Ended
September 30, 2017
  Income (Loss)
 Shares
 
Per Share
Amount

 Income (Loss)
 Shares
 
Per Share
Amount

Basic Net Income per Share:            
Net Income (Loss) Attributable to Trecora Resources $(1,609) 24,483
 $(0.07) $1,718
 24,304
 $0.07
Unvested restricted stock units   398
     379
  
Dilutive stock options outstanding   294
     474
  
Diluted Net Income per Share:            
Net Income (Loss) Attributable to Trecora Resources $(1,609) 25,175
 $(0.06) $1,718
 25,157
 $0.07


Table of Contents
10



  Nine Months Ended
September 30, 2018		 Nine Months Ended
September 30, 2017
  Income
 Shares
 
Per Share
Amount

 Income
 Shares
 
Per Share
Amount

Basic Net Income per Share:            
Net Income Attributable to Trecora Resources $2,958
 24,397
 $0.12
 $4,037
 24,267
 $0.17
Unvested restricted stock units   383
     360
  
Dilutive stock options outstanding   358
     455
  
Diluted Net Income per Share:            
Net Income Attributable to Trecora Resources $2,958
 25,138
 $0.12
 $4,037
 25,082
 $0.16

At March 31,September 30, 2018 and 2017, respectively, 1,242,160873,708 and 1,344,087 potential1,334,087 shares 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 some Saudi Arabiancertain shareholders whereby theysuch shareholders traded 65,000 common shares of TREC stock 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:
  March 31, 2018  December 31, 2017 
  (thousands of dollars) 
Accrued state taxes $332  $272 
Accrued property taxes  703   - 
Accrued payroll  983   1,407 
Accrued interest  31   30 
Accrued officer compensation  300   500 
Other  1,880   1,752 
    Total $4,229  $3,961 
  September 30, 2018
 December 31, 2017
  (thousands of dollars)
Accrued state taxes $157
 $272
Accrued property taxes 1,350
 —
Accrued payroll 1,099
 1,407
Accrued interest 31
 30
Accrued officer compensation 600
 500
Other 2,781
 1,752
Total $6,018
 $3,961

10. LIABILITIES AND LONG-TERM DEBT

Senior Secured Credit Facilities. On October 1, 2014, weJuly 31, 2018, TOCCO, as borrower, and SHR, GSPL and TC, as guarantors (collectively, the “Guarantors”), entered into ana Fourth Amendment (“Fourth Amendment”) to our Amended and Restated Credit Agreement ("ARC"(the “ARC”). Pursuant to the Fourth Amendment, the revolving commitment under the ARC (the “Revolving Facility”) was increased from $60.0 million to $75.0 million. Total borrowings under the term loan facility of the ARC (the “Term Loan Facility” and, together with the lendersRevolving Facility, the “Credit Facilities”) were increased to $87.5 million under a single combined term loan, which from timecomprised new term loan borrowings together with approximately $60.4 million of previously outstanding term loans under the Term Loan Facility. The $60.4 million of previously outstanding term loans included the remaining outstanding balances on (i) a $70.0 million single advance term loan incurred to time are partiespartially finance the acquisition of TC (which we refer to as the “Acquisition loan”) and (ii) a $25.0 multiple advance term loan facility for which borrowing availability ended on December 31, 2015. 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 Fourth Amendment also increased the size of the accordion feature allowing us to request an increase to the ARC and Bankcommitment under the Revolving Facility and/or the Term Loan Facility by an additional amount of America, N.A., as Administrative Agent forup to $50.0 million in the Lenders, and Merrill Lynch, Pierce, Fenner & Smith Incorporated as Lead Arranger. On March 28, 2017, we entered into a Second Amendmentaggregate, subject to the ARC with terms which increaselenders acceptance of any increased commitment and certain other conditions. As of September 30, 2018, we had $20.0 million in borrowings outstanding under the Maximum Consolidated Leverage Ratio financial covenantRevolving Facility and $86.4 million in borrowings outstanding under the Term Loan Facility. In addition, we had $55 million of 3.25x to 4.00x at March 31, 2017, and 4.25x at June 30, 2017, before stepping down to 3.75xavailable borrowings under our Revolving Facility at September 30, 2017, 3.50x at December 31, 2017, and reverting to the original financial covenant of 3.25x at March 31, 2018.

For Fiscal Quarter Ending
Maximum 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


Table of Contents
11



The Fourth Amendment also extended the maturity date for the ARC from October 1, 2019 to July 31, 2023 and decreased the interest rate margin applicable to borrowings under each of Contents
the Credit Facilities. Following the effective date of the Fourth Amendment, borrowings under each of the Credit Facilities bear interest on the outstanding principal amount at a rate equal to London Interbank Offered Rate ("LIBOR") plus an applicable margin of 1.25% to 2.25% (decreased from 2.00% to 3.00%) or, at our option, the Base Rate (as defined in the ARC) plus an applicable margin of 0.25% to 1.25% (decreased from 1.00% to 2.00%), 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% (decreased from 0.25% to 0.375%) is also payable quarterly on the unused portion of the Revolving Facility. As of September 30, 2018, the effective interest rate for the Credit Facilities was 4.24%. 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; 10provided 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 SecondFourth Amendment also reducesmodified certain covenants and other provisions of the MinimumARC 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), (ii) decreasing the minimum Consolidated Fixed Charge Coverage Ratio of 1.25x(as defined in the ARC) that must be maintained by TOCCO to 1.10x at March 31, 2017, 1.05x at June 30, 20171.15 to 1.00 and September 30, 2017, 1.10x at(iii) eliminating the requirement that TOCCO maintain a minimum asset coverage ratio. Pursuant to the Fourth Amendment, we are only required to comply with the minimum Consolidated Fixed Charge Leverage Ratio covenant beginning with the quarter ended December 31, 2017, before reverting2018. In addition to the original financial covenantforegoing, the Term Loan Facility contains a number of 1.25x at March 31, 2018.

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 4other customary affirmative and 5.

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

negative covenants. We were in compliance with all covenants at March 31,September 30, 2018.

On July 25, 2017,Following the effectiveness of the Fourth Amendment, all obligations under the ARC continue to be unconditionally guaranteed by the Guarantors and continue to be secured by a first priority lien on substantially all of the assets of TOCCO SHR, GSPL, and TC (SHR, GSPLthe Guarantors under the ARC.
For a summary of additional terms of the Credit Facilities and TC collectively, the "Guarantors") entered into a Third Amendment to Amendedprevious amendments, see Note 13, “Long-Term Debt and Restated Credit Agreement ("3rd Amendment") with the lenders which from time to time are partiesLong-Term Obligations” to the Amended and Restated Credit  Agreement (collectively, the "Lenders") and Bank of America, N.A., a national banking association, as Administrative Agentconsolidated financial statements set forth in our Annual Report on Form 10-K for the Lenders.  The 3rd Amendment increased the Revolving Facility from $40.0 million to $60.0 million.  There were no other changes to the Revolving Facility.  Under the ARC as amended, we have a $60.0 million revolving line of credit which matures on October 1, 2019.  As of March 31, 2018, andyear ended December 31, 2017, there was a long-term amount of $45.0 million and $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 March 31, 2018, approximately $14.9 million was available to be drawn; however, only $10.0 million could be drawn while maintaining compliance with our covenants.2017.

Under the ARC, we also borrowed $70.0 million in a single advance term loan (the "Acquisition Loan") to partially finance the acquisition of TC.  Interest on the Acquisition Loan is payable quarterly using a ten-year commercial style amortization.  Principal is also payable on the last business day of each March, June, September and December in an amount equal to $1.8 million, provided that the final installment on the September 30, 2019, maturity date shall be in an amount equal to the then outstanding unpaid principal balance of the Acquisition Loan.  At March 31, 2018, there was a short-term amount of $7.0 million and a long-term amount of $38.5 million outstanding.  At December 31, 2017, there was a short-term amount of $7.0 million and a long-term amount of $40.3 million outstanding.

Under the ARC, we also had the right to borrow $25.0 million in a multiple advance loan ("Term Loans").  Borrowing availability under the Term Loans ended on December 31, 2015.  The Term Loans converted from a multiple advance loan to a "mini-perm" loan once certain obligations were fulfilled such as certification that construction of D-Train was completed in a good and workmanlike manner, receipt of applicable permits and releases from governmental authorities, and receipt of releases of liens from the contractor and each subcontractor and supplier.  Interest on the Term Loans is paid monthly.  Principal is 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 on the September 30, 2019, maturity date shall be in an amount equal to the then outstanding unpaid principal balance of the Term Loans. At March 31, 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 $16.0 million outstanding.

11Debt Issuance Costs.
Debt issuance costs of approximately $0.4$0.9 million were incurred in connection with the Fourth Amendment and the remaining debt issuance costs of $0.3 million from the previous agreements were expensed and are shown as a loss on the extinguishment of debt on the consolidated statements of income for the three and nine months ended September 30, 2018. Unamortized debt issuance costs of approximately $0.9 million and $0.5 million for the periods ended March 31,September 30, 2018 and December 31, 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 March 31, 2018, and December 31, 2017, the rate was 4.38% and 4.07%, respectively.

The following table summarizes the carrying amounts and debt issuance costs of our long-term debt (in thousands):
 September 30, 2018
 December 31, 2017
Acquisition loan$—
 $47,250
Term loan86,406
 17,333
Revolving facility20,000
 35,000
Total106,406
 99,583
Debt issuance costs(875) (501)
Total long-term debt$105,531
 $99,082
Less current portion including loan fees4,194
 8,061
Total long-term debt, less current portion including loan fees$101,337
 $91,021

  March 31, 2018  December 31, 2017 
       
Acquisition loan $45,500  $47,250 
Term loan  17,000   17,333 
Revolving facility  45,000   35,000 
Total  107,500   99,583 
Debt issuance costs  (408)  (501)
Total long-term debt $107,092  $99,082 
         
Less current portion including loan fees  8,061   8,061 
         
Total long-term debt, less current portion including loan fees $99,031  $91,021 

11. FAIR VALUE MEASUREMENTS

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.

Table of Contents
12



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")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.

We assessed 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 March 31,September 30, 2018, orand December 31, 2017.  See discussion of our derivative instruments in Note 12.

12. DERIVATIVE INSTRUMENTS

Interest Rate Swap

On March 21, 2008, SHR entered into a pay-fixed, receive-variable interest rate swap agreement with Bank of America related to the $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 terminated on December 15, 2017.  We received credit for payments of variable rate interest made on the term loan at the loan's variable rates, which are based upon the LIBOR, and paid 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.

12
Due to the new debt agreements associated with the Acquisition,acquisition of TC, we believed 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 the interest rate swap as ineffective as of October 1, 2014.

13. STOCK-BASED COMPENSATION

Stock-based compensation of approximately $592,000$629,000 and $633,000$716,000 during the three months and $1,002,000 and $2,005,000 during the nine months ended March 31,September 30, 2018, and 2017, respectively, was recognized.

Restricted Stock Awards

On August 9, 2018, we awarded approximately 40,000 shares of restricted stock to employees at a grant date price of $12.85. The stock will vest six months from the grant date. Compensation expense recognized during the three months ended September 30, 2018, was $171,000.

On January 17, 2018, we awarded 251361 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 March 31,September 30, 2018, was $0 and for the nine months ended September 30, 2018, was $5,000.

Restricted Stock Unit Awards

On September 1, 2018, we awarded approximately 9,000 shares of restricted stock to a director at a grant date price of $14.00. The restricted stock award vests over 2 years in 50% increments. Director’s compensation recognized during the three and nine months ended September 30, 2018, was approximately $4,000.

On February 20, 2018, we awarded approximately 102,000 shares of restricted stock units to officers at a grant date price of $12.15.  One-half of the restricted stock units vest ratably over three years.  The other half vests at the end of three years

Table of Contents
13



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 months ended March 31,September 30, 2018, was approximately $36,000.$108,000 and for the nine months ended September 30, 2018, was $252,000.

Officer compensation of approximately $112,000$95,000 and $0$121,000 during the three months March 31,and $301,000 and $161,000 during the nine months ended September 30, 2018, and 2017, respectively, was recognized related to restricted stock unit awards granted to officers vesting through 2020.

Director compensation of approximately $84,000$75,000 and $81,000$75,000 during the three months March 31,and $240,000 and $231,000 during the nine months ended September 30, 2018, and 2017, respectively, was recognized related to restricted stock unit awards granted to directors vesting through 2020.

Officer compensation of approximately $97,000$79,000 and $105,000$106,000 was recognized during the three months and $255,000 and $316,000 during the nine months ended March 31,September 30, 2018, and 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.

Employee compensation of approximately $104,000$98,000 and $108,000 during the three months and $300,000 and $323,000 during the nine months ended March 31,September 30, 2018, and 2017, respectively, was recognized related to restricted stock units with a four yearyears vesting period which was awarded to officers.  This restricted stock vests through 2019.

Restricted stock units activity in the first threenine months of 2018 was as follows:

  
Shares of Restricted
Stock Units
  
Weighted Average Grant Date Price per Share
 
       
Outstanding at January 1, 2018  387,702  $11.39 
   Granted  102,317  $12.15 
   Forfeited  (34,585) $10.97 
   Vested  (51,998) $12.34 
Outstanding at March 31, 2018  403,436  $11.50 


13
 
Shares of Restricted
Stock Units
 Weighted Average Grant Date Price per Share
Outstanding at January 1, 2018387,702
 $11.39
Granted151,908
 $12.45
Forfeited(48,631) $10.88
Vested(92,874) $11.85
Outstanding at September 30, 2018398,105
 $11.72

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, 2018  1,323,587  $7.82    
   Granted  --   --    
   Exercised  (81,427)  6.26    
   Forfeited  --   --    
Outstanding at March 31, 2018  1,242,160  $7.93   4.1 
Exercisable at March 31, 2018  1,042,160  $8.80   4.7 
 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(249,879) 5.61
  
Cancelled(200,000) 3.40
  
Forfeited—
 —
  
Outstanding at September 30, 2018873,708
 $9.47
 4.5
Exercisable at September 30, 2018873,708
 $9.47
 4.5

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.


Table of Contents
14



Directors' compensation of approximately $0 and $30,000 during the three months and $0 and $90,000 during the nine months ended March 31,September 30, 2018, and 2017, respectively, was recognized related to options to purchase shares vesting through 2017.

Employee compensation of approximately $154,000$0 and $309,000$277,000 during the three months and $154,000 and $884,000 during the nine months ended March 31,September 30, 2018, and 2017, respectively, was recognized related to options with a four-4- year vesting period which were awarded to officers and key employees.  These options vest through 2018.

Post-retirement compensation of approximately $0 and $0 was recognized during the three months and $679,000 and $0 during the nine months ended March 31,September 30, 2018, and 2017, was reversed related to options awarded to Mr. Hatem El Khalidi in July 2009.  On May 9, 2010, the Board of Directors determined that Mr. El Khalidi forfeited these options and other retirement benefits when he made various demands against the Company and other AMAK Saudi shareholders which would benefit him personally and were not in the best interests of the Company and its shareholders.  The Company 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 18.19.

See the Company's Annual Report on Form 10-K for the year ended December 31, 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 March 31, 2018 
  Petrochemical  Specialty Wax  Corporate  Eliminations  Consolidated 
  (in thousands) 
Product sales $60,285  $6,383  $-  $31  $66,699 
Processing fees  2,028   3,212   -   (198)  5,042 
Total revenues  62,313   9,595   -   (167)  71,741 
Operating profit (loss) before depreciation and amortization  8,393   390   (2,148)  
-
   6,635 
Operating profit (loss)  6,679   (914)  (2,156)  -   3,609 
Profit (loss) before taxes  6,054   (1,181)  (1,931)  -   2,942 
Depreciation and amortization  1,714   1,304   8   -   3,026 
Capital expenditures  10,283   745   -   -   11,028 
 Three Months Ended September 30, 2018
 Petrochemical
 Specialty Wax
 Corporate
 Eliminations
 Consolidated
 (in thousands)
Product sales$61,675
 $6,938
 $—
 $—
 $68,613
Processing fees2,056
 2,799
 —
 (52) 4,803
Total revenues63,731
 9,737
 —
 (52) 73,416
Operating profit (loss) before depreciation and amortization6,167
 415
 (2,252) —
 4,330
Operating profit (loss)3,516
 (936) (2,270) —
 310
Profit (loss) before taxes2,561
 (1,239) (3,404) —
 (2,082)
Depreciation and amortization2,651
 1,351
 16
 —
 4,018
Capital expenditures2,562
 1,094
 —
 —
 3,656
 Three Months Ended September 30, 2017
 Petrochemical
 Specialty Wax
 Corporate
 Eliminations
 Consolidated
 (in thousands)
Product sales$52,440
 $5,590
 $—
 —
 $58,030
Processing fees1,519
 1,959
 —
 —
 3,478
Total revenues53,959
 7,549
 —
 —
 61,508
Operating profit (loss) before depreciation and amortization9,319
 (587) (1,957) —
 6,775
Operating profit (loss)7,735
 (1,795) (1,975) —
 3,965
Profit (loss) before taxes7,149
 (1,975) (2,879) —
 2,295
Depreciation and amortization1,584
 1,208
 18
 —
 2,810
Capital expenditures9,426
 1,991
 —
 —
 11,417

Table of Contents
14
Table of Contents
15



  Three Months Ended March 31, 2017 
  Petrochemical  Specialty Wax  Corporate  Eliminations  Consolidated 
  (in thousands) 
Product sales $44,391  $6,508  $-   -  $50,899 
Processing fees  1,488   3,155   -   -   4,643 
Total revenues  45,879   9,663   -   -   55,542 
Operating profit (loss) before depreciation and amortization  8,214   745   (2,179)  
-
   6,780 
Operating profit (loss)  6,658   (271)  (2,195)  -   4,192 
Profit (loss) before taxes  6,005   (290)  (3,167)  -   2,548 
Depreciation and amortization  1,556   1,016   16   -   2,588 
Capital expenditures  8,756   5,125   -   -   13,881 
 Nine Months Ended September 30, 2018
 Petrochemical
 Specialty Wax
 Corporate
 Eliminations
 Consolidated
 (in thousands)
Product sales$178,094
 $20,755
 $—
 $32
 $198,881
Processing fees5,769
 8,863
 —
 (250) 14,382
Total revenues183,863
 29,618
 —
 (218) 213,263
Operating profit (loss) before depreciation and amortization20,655
 1,969
 (5,234) —
 17,390
Operating profit (loss)14,635
 (2,051) (5,268) —
 7,316
Profit (loss) before taxes12,474
 (2,926) (5,877) —
 3,671
Depreciation and amortization6,020
 4,020
 32
 —
 10,072
Capital expenditures16,374
 2,716
 —
 —
 19,090

  March 31, 2018 
  Petrochemical  Specialty Wax  Corporate  Eliminations  Consolidated 
  (in thousands) 
Trade receivables, product sales $21,495  $3,127  $-  $25  $24,647 
Trade receivables, processing fees  1,018   1,841   -   (85)  2,774 
Goodwill and intangible assets, net  -   42,141   -   -   42,141 
Total assets  275,063   117,297   97,543   (154,777)  335,126 
 Nine Months Ended September 30, 2017
 Petrochemical
 Specialty Wax
 Corporate
 Eliminations
 Consolidated
 (in thousands)
Product sales$147,339
 $18,606
 $—
 —
 $165,945
Processing fees5,078
 8,142
 —
 —
 13,220
Total revenues152,417
 26,748
 —
 —
 179,165
Operating profit (loss) before depreciation and amortization26,294
 969
 (5,978) —
 21,285
Operating profit (loss)21,610
 (2,264) (6,027) —
 13,319
Profit (loss) before taxes19,750
 (2,534) (11,209) —
 6,007
Depreciation and amortization4,684
 3,233
 49
 —
 7,966
Capital expenditures27,203
 12,047
 —
 —
 39,250
 September 30, 2018
 Petrochemical
 Specialty Wax
 Corporate
 Eliminations
 Consolidated
 (in thousands)
Trade receivables, product sales$22,600
 $3,896
 $—
 $—
 $26,496
Trade receivables, processing fees1,165
 2,126
 —
 —
 3,291
Goodwill and intangible assets, net—
 41,210
 —
 —
 41,210
Total assets282,094
 115,146
 91,647
 (154,138) 334,749
 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

  December 31, 2017 
  Petrochemical  Specialty Wax  Corporate  Eliminations  Consolidated 
  (in thousands) 
Trade receivables, product sales $20,211  $2,671  $-  $-  $22.882 
Trade receivables, processing fees  983   1,914   -   -   2,897 
Goodwill and intangible assets, net  -   42,606   -   -   42,606 
Total assets  265,213   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.  We received notification from the IRS in March 2018 that audit was complete and acceptance of the refund claims resulting from the Research and Development ("R&D&D") credit for approximately $350,000.$350,000, which has now been received.  We also received notification that Texas will audit our R&D credit calculations for 2014 and

Table of Contents
16



2015.  We are in the process of submitting additional documentation to Texas.  We do not expect any changes related to the Texas audit.  Tax returns for various jurisdictions remain open for examination for the years 2014 through 2017.  As of March 31,September 30, 2018 and December 31, 2017, respectively, we recognized no adjustment for uncertain tax positions.  As of March 31, 2018,positions or related interest and December 31, 2017, no interest or penalties related to uncertain tax positions have been accrued.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 and a research and development credit for the three and nine months ended March 31,September 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 nine months ended March 31,September 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 Tax Cuts and Jobs Act (TCJA)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)("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 manufacturing deduction, acceleration of tax revenue recognition, capitalization of research and development expenditures, additional limitations on executive compensation and limitations on the deductibility of interest.

15
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 application 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 for certain 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 one year measurement period to finalize the measurement of the impact of the TCJA.

We have recognized the provisional tax impacts related to the acceleration of depreciation and included these amounts in our consolidated financial statements for the three and nine months ended March 31,September 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 March 31,September 30, 2018 and December 31, 2017. The federal income tax return was filed in October 2018, which resulted in net operating tax loss and business credit which were carried back to 2015 and 2016.

Subsequent to quarter end, we received income tax refunds of approximately $4.4 million that were listed as income tax receivable at March 31, 2018.

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 18.19.  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 March 31, 2018, and December 31, 2017, approximately $1.0 million remained outstanding and was included in post-retirement benefits.

In July 2015 and June 2018, we entered into a retirement agreementagreements with our former CEO Nicholas Carter.and current Executive Chairman, and our former VP of Accounting & Compliance. As of March 31,September 30, 2018 and December 31, 2017, approximately $0.2$0.4 million and $0.3 million, respectively, 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, 2017 for additional information.

17. INVESTMENT IN AMAK

In first quarter 2018, we completed an exchange of shares with some Saudi Arabiancertain shareholders whereby theysuch shareholders traded 65,000 common shares of TREC stock in exchange for 24,489 shares of our AMAK stock.  The 65,000 shares were accounted for as treasury stock.  This transaction reduced our ownership percentage from 33.44% to 33.41%.


Table of Contents
17



As of March 31,September 30, 2018 and December 31, 2017, the Company had a non-controlling equity interest of 33.4% in AMAK of approximately $45.2$44.3 million and $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 March 31,September 30, 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:

Results of Operations

  
Three Months Ended
March 31,
 
  2018  2017 
  (thousands of dollars) 
Sales $14,087  $2,256 
Gross profit (loss)  1,581   (1,307)
General, administrative and other expenses  1,900   2,589 
Net Loss $(319) $(3,896)


Table of Contents
16
Depreciation and amortization was $7.7 million and $0.5 million for the three months ended March 31, 2018, and 2017, respectively.  Therefore, net income before depreciation and amortization was as follows:
  Three Months Ended September 30, Nine Months Ended September 30,
  2018
 2017
 2018
 2017
  (thousands of dollars) (thousands of dollars)
Sales $19,877
 $9,709
 $53,458
 $11,965
Cost of sales 20,350
 11,016
 49,411
 23,480
Gross profit (loss) $(473) $(1,307) $4,047
 $(11,515)
General, administrative and other expenses 3,917
 2,382
 9,083
 6,942
Net Loss $(4,390) $(3,689) $(5,036) $(18,457)
Depreciation and amortization 8,899
 6,214
 24,881
 16,880
Net income (loss) before depreciation and amortization $4,509
 $2,525
 $19,845
 $(1,577)

  
Three Months Ended
March 31,
 
  2018  2017 
  (thousands of dollars) 
Net income (loss) before depreciation and amortization $7,382  $(3,369)

Financial Position
  March 31,  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 
  September 30,
 December 31,
  2018
 2017
  (thousands of dollars)
Current assets $44,238
 $23,333
Noncurrent assets 214,708
 237,875
Total assets $258,946
 $261,208
     
Current liabilities $11,569
 $24,439
Long term liabilities 83,826
 68,837
Shareholders' equity 163,551
 167,932
  $258,946
 $261,208

The equity in the income or loss of AMAK reflected on the consolidated statements of income for the three months and nine months ended March 31, September 30, 2018, and 2017, is comprised of the following:
  Three Months Ended
September 30,		 Nine Months Ended
September 30,
  2018
 2017
 2018
 2017
  (thousands of dollars) (thousands of dollars)
AMAK Net Loss $(4,390) $(3,689) $(5,036) $(18,457)
         
Company's share of loss reported by AMAK $(1,467) $(1,234) $(1,682) $(6,172)
Amortization of difference between Company's investment in AMAK and Company's share of net assets of AMAK 337
 337
 1,010
 1,011
Equity in loss of AMAK $(1,130) $(897) $(672) $(5,161)

  
Three months ended
March 31,
 
  2018  2017 
  (thousands of dollars) 
AMAK Net Loss $(319) $(3,896)
         
Company's share of loss reported by AMAK $(107) $(1,303)
Amortization of difference between Company's investment in AMAK and Company's share of net assets of AMAK  337   337 
Equity in earnings (loss) of AMAK $230  $(966)
Table of Contents
18




See our Annual Report on Form 10-K for the year ended December 31, 2017 for additional information.

At March 31,September 30, 2018, and December 31, 2017, we had a receivable from AMAK of approximately $165,000$235,000 and $121,000, respectively, relating to unreimbursed travel and Board expenses which are included in prepaid and other assets.  We did not advance any cash to AMAK during 2018.

18. RELATED PARTY TRANSACTIONS

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

Consulting fees of approximately $31,000$25,000 and $19,000 were incurred during the three months and $75,000 and $56,000 during the nine months ended March 31,September 30, 2018 and 2017, respectively, from our Executive Chairman, 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.


Table of Contents
17
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 March 31,September 30, 2018, was 305.0 million Saudi Riyals (US$81.3 million).  AMAK has not made certain scheduled payments on their loan.  They obtained a waiver from SIDF regarding the missed payments and are currently working with SIDF to renegotiate the terms and repayment schedule of the loan agreement.  We do not believe that these events will result in any performance under our guarantee.

Operating Lease Commitments

We 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 three months ended March 31,September 30, 2018, and 2017, was $1.1$1.0 million and $0.8$1.0 million, respectively, and for the nine months ended September 30, 2018, and 2017, was $3.0 million and $2.7 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.  The Trial Court dismissed all of Mr. El Khalidi's claims and causes of action with prejudice and the Ninth Court of Appeals affirmed. Mr. El Khalidi 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.  LiabilitiesOn May 25, 2018, the Supreme Court of approximately $1.0 million remain recorded,Texas denied the motion for rehearing and the options will continue to accrue in accordance with their own terms until all matters are resolved.matter 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 a material

Table of Contents
19



adverse effect on our business, prospects, financial condition or results of operations. We may become involved in material legal proceedings in the future.

Supplier Agreements

From time to time, we may incur shortfall fees due to feedstock purchases being below the minimum amounts prescribed by our agreements with our suppliers.  Shortfall fee expenses for the three months ended March 31,September 30, 2018, and 2017, were $0.1$0.2 million and $0.9$0.3 million, respectively, and for the nine months ended September 30, 2018, and 2017, were $0.7 million and $1.4 million, respectively.

Environmental Remediation

Amounts charged to expense for various activities related to environmental monitoring, compliance, and improvements were approximately $149,000$146,000 and $165,000$119,000 for the three months ended March 31,and $430,000 and $444,000 for the nine months ended September 30, 2018, and 2017, respectively.


20. SUBSEQUENT EVENTS


In mid-September the Silsbee facility suffered a power outage causing a shutdown of the plant including the Advanced Reformer unit. In mid-October, after extensive engineering review and consultations with the technology licensor of the Advanced Reformer unit, it was determined that the unit's catalyst required replacement. Although the unit continues to operate, the product is not meeting design specifications thus negatively impacting the unit's expected financial benefit. We are working with the catalyst manufacturer to replace the catalyst in the fourth quarter. The estimated cost of replacement is $4 million. The replacement will be capitalized and depreciated.


Table of Contents
18

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

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 which 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.


Table of Contents
20



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, 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-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.  BothWe believe that both the advanced reformerAdvanced Reformer unit and the hydrogenation/distillation projectunit will providecontribute to increased revenue and gross margin.margin over time and as we improve reliability.  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 strategy and outlook. 

In February 2018, while commissioningattempting to commission the new advanced reformer,Advanced Reformer unit at our Silsbee facility, the unit overheated and ignited a fire. The response team quickly extinguished the fire without injury, and there was no environmental impact.  However, thereThere was damage to all six heaters in the unit, and the damaged equipment is beinghad to be replaced. The total repair cost was approximately $3.5 million. Our best estimate of the start-up is in third quarter 2018.  Insurance adjustors have beeninsurers agreed to the site multiple times, and we expect that our insurers will cover any costs over our $1 million deductible. In the second quarter we received an initial advance payment of approximately $2 million, in the third quarter we received $0.2 million, and we expect to receive the balance in the fourth quarter.

On July 9, 2018, we announced the safe and successful start up of our Advanced Reformer unit at our Silsbee facility. In mid-September the Silsbee facility suffered a power outage causing a shutdown of the plant including the Advanced Reformer unit. In mid-October, after extensive engineering review and consultations with the technology licensor of the Advanced Reformer unit it was determined that the unit's catalyst required replacement. Although the unit continues to operate the product is not meeting design specifications thus negatively impacting the unit's expected financial benefit. We are working with the catalyst manufacturer to replace the catalyst in the fourth quarter. The estimated cost of replacement is $4 million. The replacement will be capitalized and depreciated.

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 FirstThird Quarter 2018 Results

We reported firstthird quarter 2018 losses of $1.6 million down from $1.7 million earnings of $2.4 million up from $1.5 million from firstin third quarter 2017. Diluted earnings per share of $0.09$(0.06) were reported for 2018, updown from $0.06$0.07 in 2017. Sales volume of our petrochemical products increased 34.4%decreased 3.5%, and sales revenue from our petrochemical products increased 35.8%18.0% as compared to firstthird quarter 2017. Prime product petrochemical sales volumes (which exclude by-product sales) were up 27.1%1.8% over firstthird quarter 2017. Wax sales revenue
Table of Contents
19
was down 1.9%volume increased 12.7% compared to firstthird quarter 2017 and wax sales revenue was up 23.3% compared to third quarter 2017. GrossTrecora Resources gross profit margin decreased to 14.1%9.3% of sales in firstthird quarter 2018 from 19.2%16.0% in firstthird quarter 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
March 31,
 
  2018  2017 
Net Income $2,352  $1,487 
         
    Interest expense  878   636 
    Depreciation and amortization  3,026   2,588 
    Income tax expense  590   1,061 
EBITDA $6,846  $5,772 
         
    Share-based compensation  592   633 
    Equity in (earnings) losses of AMAK  (230)  966 
Adjusted EBITDA $7,208  $7,371 
         
Net Income $2,352  $1,487 
         
        Equity in (earnings) losses of AMAK $(230) $966 
    Taxes at statutory rate of 21% for  2018 and 35% for 2017  48   (338)
    Tax effected equity in (earnings) losses  (182)  628 
Adjusted Net Income $2,170  $2,115 

Table of Contents
21



  Three Months Ended
September 30,		 Nine Months Ended
September 30,
  2018
 2017
 2018
 2017
  (Thousands of Dollars)
Net Income (Loss) $(1,609) $1,718
 $2,958
 $4,037
Interest expense 924
 795
 2,617
 2,109
Depreciation and amortization 4,018
 2,810
 10,072
 7,966
Income tax expense (benefit) (473) 577
 713
 1,970
EBITDA $2,860
 $5,900
 $16,360
 $16,082
Share-based compensation 630
 716
 1,002
 2,005
Loss on extinguishment of debt 315
 —
 315
 —
Equity in losses of AMAK 1,130
 897
 672
 5,161
Adjusted EBITDA $4,935
 $7,513
 $18,349
 $23,248
         
Net Income (Loss) $(1,609) $1,718
 $2,958
 $4,037
Equity in losses of AMAK $1,130
 $897
 $672
 $5,161
Taxes at statutory rate of 21% for 2018 and 35% for 2017 (237) (314) (141) (1,806)
Tax effected equity in losses 893
 583
 531
 3,355
Adjusted Net Income (Loss) $(716) $2,301
 $3,489
 $7,392

Liquidity and Capital Resources

Working Capital

Our approximate working capital days are summarized as follows:

  March 31, 2018  December 31, 2017  March 31, 2017 
Days sales outstanding in accounts receivable  34.4   38.4   39.3 
Days sales outstanding in inventory  19.7   27.5   24.2 
Days sales outstanding in accounts payable  18.7   27.3   21.2 
Days of working capital  35.4   38.5   42.4 
 September 30, 2018
 December 31, 2017
 September 30, 2017
Days sales outstanding in accounts receivable38.1
 38.4
 34.6
Days sales outstanding in inventory22.8
 27.5
 19.6
Days sales outstanding in accounts payable17.0
 27.3
 18.9
Days of working capital43.9
 38.5
 35.4

Our days sales outstanding in accounts receivable decreased dueslightly as compared to an increase in sales volume during January which were paid before quarter end and are therefore, not reflected in accounts receivable.December 31, 2017.  Our days sales outstanding in inventory decreased also due to the increase in sales volume which reduced inventory on hand.  Our days sales outstanding in accounts payable decreased due to construction expenses for the new advanced reformer unit nearing completion.newly completed Advanced Reformer unit.  Since days of working capital is calculated using the above three metrics, it decreasedincreased for the reasons discussed.

Table of Contents
20
Cash decreased $0.5$1.7 million during the threenine months ended March 31,September 30, 2018, as compared to a decrease of $4.3$4.2 million for the threenine months ended March 31,September 30, 2017.  Our total available liquidity, which includes cash and available revolving borrowing capacity under the ARC, was approximately $17.4$56.3 million and $37.9 million at March 31,September 30, 2018 and December 31, 2017, respectively. Going forward, amounts able to be drawn under the Revolving Facility may be limited to maintain compliance with our covenants.


Table of Contents
22



The change in cash is summarized as follows:

  2018  2017 
Net cash provided by (used in) (thousands of dollars) 
Operating activities $2,735  $8,730 
Investing activities  (11,072)  (13,907)
Financing activities  7,877   833 
Decrease in cash $(460) $(4,344)
Cash $2,568  $4,045 
  THREE MONTHS ENDED SEPTEMBER 30,
  2018
 2017
Net cash provided by (used in) (thousands of dollars)
Operating activities $11,110
 $29,554
Investing activities (19,204) (39,336)
Financing activities 6,358
 5,612
Decrease in cash $(1,736) $(4,170)
Cash $1,292
 $4,219

Operating Activities
Cash provided by operating activities totaled $2.7$11.1 million for the first threenine months of 2018, $6.0$18.4 million lower than 2017.    For the first threenine months of 2018 net income increaseddecreased by approximately $0.9$1.08 million as compared to the corresponding period of 2017.  Major non-cash items affecting 2018 income included increases in deferred taxes of $0.4$1.0 million, depreciation of $2.6$8.6 million and equity in earningslosses of AMAK of $0.2$0.7 million.  Major non-cash items affecting 2017 income included increases in deferred taxes of $1.2$1.6 million, depreciation of $2.1$6.6 million, and equity in losses of AMAK of approximately $1.0$5.2 million.

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

·
Insurance receivable increased approximately $0.7 million (due to a claim filed for the new advanced reformer fire) as compared to no receivable in 2017;
Accounts receivable increased approximately $4.2 million due to timing of sales later in the quarter, with average days sales outstanding in accounts receivable of 38 days, leading to outstanding receivables at the end of the quarter;

·Prepaid and other assets increased approximately $0.8 million (primarily due to the inventorying of spare parts) as compared to a decrease of approximately $0.1 million in 2017 (primarily due to a reduction in prepaid insurance); and
Insurance receivable increased approximately $0.4 million (due to a claim filed for the new Advanced Reformer fire) as compared to no receivable in 2017;

·Accounts payable and accrued liabilities decreased $3.2 million (due to decreased construction expenditures) as compared to an increase of approximately $1.0Prepaid and other assets increased approximately $1.6 million (primarily due to the inventorying of spare parts) as compared to a decrease of approximately $387,000 in 2017 (primarily due to a reduction in prepaid insurance); and

Accounts payable and accrued liabilities decreased $3.0 million (due to decreased construction expenditures) as compared to an increase of approximately $3.4 million in 2017 (due to increased construction expenditures).

Investing Activities

Cash used by investing activities during the first threenine months of 2018 was approximately $11.1$19.2 million, representing a decrease of approximately $2.8$20.1 million over the corresponding period of 2017.   During the first threenine months of 2018, the primary use of capital expenditures was for the the new advanced reformerAdvanced Reformer unit and the addition of a rail spur at ourthe SHR loading facility.  During the first threenine months of 2017, we continued to purchase equipment for the hydrogenation/distillation unit and the new advanced reformerAdvanced Reformer unit along with some tankage and various other facility improvements.

Financing Activities

Cash provided by financing activities during the first threenine months of 2018 was approximately $7.9$6.4 million versus cash provided of $0.8$5.6 million during the corresponding period of 2017. During 2018, we made principal payments onrestructured our acquisition loan of $1.8 million and our term debt of $0.3 million.agreement, as detailed in Note 10. We drew $10.0$18.2 million on our line of credit to fund ongoing capital projects.projects during the first nine months of 2018. As discussed in Note 10, proceeds of the new borrowings under the Term Loan Facility were used to repay a portion of the outstanding borrowings under the Revolving Facility. During 2017, we made principal payments on our acquisition loan of $3.5 million, and our term debt of $0.7 million, and our line of credit facility of $2.0 million. We drew $5.0$14.0 million on our line of credit to fund ongoing capital projects.




Table of Contents
23



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.


Table of Contents
21


Results of Operations

Comparison of Three Months Ended March 31,September 30, 2018 and 2017

Specialty Petrochemical Segment

  2018  2017  Change  %Change 
  (thousands of dollars) 
Petrochemical Product Sales $60,285  $44,391  $15,894   35.8%
Processing  2,028   1,488   540   36.3%
Gross Revenue $62,313  $45,879  $16,434   35.8%
                 
Volume of Sales (gallons)                
  Petrochemical Products  23,289   17,324   5,965   34.4%
  Prime Product Sales  17,651   13,892   3,759   27.1%
                 
  Cost of Sales $52,649  $36,358  $16,291   44.8%
  Gross Margin  15.5%  20.8%  (5.3%)  (25.3%)
  Total Operating Expense**  15,843   12,969   2,874   22.2%
  Natural Gas Expense**  1,248   1,084   164   15.1%
  Operating Labor Costs**  3,759   3,243   516   15.9%
  Transportation Costs**  7,320   5,696   1,624   28.5%
  General & Administrative Expense  2,820   2,696   124   4.6%
  Depreciation and Amortization*  1,714   1,556   158   10.2%
  Capital Expenditures $10,283  $8,756  $1,527   17.4%
  2018
 2017
 Change
 % Change
  (thousands of dollars)
Petrochemical Product Sales $61,675
 $52,440
 $9,235
 17.6 %
Processing 2,056
 1,519
 537
 35.4 %
Gross Revenue $63,731
 $53,959
 $9,772
 18.1 %
     ��   
Volume of Sales (gallons)        
Petrochemical Products 21,564
 22,353
 (789) (3.5)%
Prime Product Sales 16,986
 16,681
 305
 1.8 %
         
Cost of Sales $57,156
 $43,424
 $13,732
 31.6 %
Gross Margin 10.3% 19.5% 

 (9.2)%
Total Operating Expense* 18,673
 15,040
 3,633
 24.2 %
Natural Gas Expense* 1,265
 1,106
 159
 14.4 %
Operating Labor Costs* 4,837
 4,412
 425
 9.6 %
Transportation Costs* 7,126
 6,051
 1,075
 17.8 %
General & Administrative Expense 2,893
 2,595
 298
 11.5 %
Depreciation and Amortization** 2,651
 1,584
 1,067
 67.4 %
Capital Expenditures 2,562
 9,426
 (6,864) (72.8)%
* Included in cost of sales
**Includes $1,548$2,486 and $1,389$1,378 for 2018 and 2017, respectively, which is included in operating expense
** Included in cost of sales

Gross Revenue

Gross Revenue for our Specialty Petrochemical segment increased during firstthird quarter 2018 from firstthird quarter 2017 by 35.8%18.1%, primarily due to an increase in the volume of 34.4%, an increase in the average selling price of 1.3%Petrochemical Products of 21.9%, and ana 35.4% increase in processing revenue of 36.3%.revenue.

Petrochemical Product Sales

Petrochemical product sales increased by 35.8%17.6% during firstthird quarter 2018 from firstthird quarter 2017 due to an increase in the volume sold of 34.4% and an increase in the average selling price of 1.3%.21.9%, which was partially offset by 3.5% decline in petrochemical sales volume due to lower sales of by-products.  Prime product sales volume increased 27.1% in first quarter 2018were flat as compared to firstthird quarter 2017.  Due2017 but increased 5.6% compared to second quarter 2018.  Prime product sales in the need to produce additionalsecond quarter were negatively affected by operating issues at some customers. Average selling price increased as prices for both prime products and by-products increased to supportoffset higher feedstock cost which were up 37% from the increase in sales volume, our by-product volume increased 64.3%.third quarter of 2017.  It should be noted that by-productby-products are produced as result of prime product production and their margins are significantly lower than margins for our prime products.  By-product margins in the first quarter of 2018 were lower compared to first quarter of 2017 mainly due to higher feedstock costs which were only partially offset by higher prices for certain components in the by-products.  Our average selling price increased for twomultiple reasons.  First, by-product selling prices were significantly higher in the firstthird quarter of 2018 compared to the firstthird quarter of 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.  Feedstockfeedstock; and lastly we have increased prices were higher in first quarter 2018 as compared to first quarter 2017.for non-formula prime products.  Foreign sales volume increased to 24.9%25.6% of total petrochemical volume from 19.6%22.1% in firstthird quarter 2017.

Table of Contents
24



Processing

Processing revenues increased 36.3% during first35.4% in third quarter 2018 from third quarter 2017, primarily due to some improvement in volumes processed and first step processing for a project that was completed at TC.increased sales to two specific existing customers.

Cost of Sales

Cost of Sales increased 44.8%31.6% during firstthird quarter 2018 from 2017 primarily due to the increase in feedstock cost and volume.higher operating expenses at our Silsbee plant.  Our average feedstock cost per gallon increased 17.4%37% over firstthird quarter 2017 primarily due to an approximately 29%39% increase in the benchmark price of Mont Belvieu natural gasoline, whichgasoline.  Our average feedstock cost per gallon for the third quarter 2018 was partially offset by lower shortfall fees and other delivery costs.flat from the second quarter of 2018. The increase in feedstock costs compressed margins especially for prime products relative to third quarter 2017. We sell our prime products under both formula-based pricing where feedstock costs are passed through to the customer and spot or non-formula portion of prime product sales.  These are salesnon-formula-based pricing which do not have pricing formulas tied to feedstock costs. DueFormula-based pricing is used to competitive reasons, we were unable to recoversell 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 during the quarter. The increase in feedstock costs through price increases.  The decrease in gross margin percentage from 20.8% to 15.5% was due to higher feedstock costs and higher operating expenses.also compressed margins for the spot, or non-formula, portion of prime product sales.

Table of Contents
22
Volume processed increased 37.8% over first quarter 2017.  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 reformerAdvanced Reformer unit which is due online in third quarter 2018 to enable us to convert the less valuable components in our feed into higher value products, thereby allowing us to sell our by-products at higher prices.

The contract pricing formulas useddecrease in gross margin percentage from 19.5% to sell the majority of10.3% 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 we experienced in the quarter. well as higher plant operating expenses.

Total Operating Expense

Total Operating Expense increased 22.2%24.2% during firstthird quarter 2018 from 2017.  NaturalThe key drivers for the increase were higher natural gas, electricity, labor, and product transportation are the largest individual expenses in this category.

The cost of natural gas purchased increased 15.1% in 2018 from 2017 due to an increase in volume consumed.  Volume increased to approximately 441,000 MMBTU from about 320,000 MMBTU.  Volume increased due to production to support increased sales and usage associated with commissioning the new advanced reformer unit.

costs. Labor costs were higher by 15.9%up 9.6% in third quarter 2018 from 2017, primarily due to overtime, training and contract labor associated with a shutdownthe start-up and operations training forassociated operating issues related to the new advanced reformerAdvanced Reformer unit.

Certain previously capitalized costs associated with the start-up of the unit were expensed during third quarter 2018. Transportation costs were higher by 28.5%17.8% primarily due to an increase in third party freight costs associated with governmental mandates which took effect in the first quarter of 2018, and an increase in the numbercost of railcars which were shipped, and an increase in all shipments.

General and Administrative Expense

General and Administrative costs for first quarter 2018 increased from 2017 by 4.6% primarilyrail freight due to an increase in administrative salaries. We made adjustments in the second half of 2017 and first quarter of 2018 in an effort to become more competitive with our support staff's compensation.

Depreciation

Depreciation increased 10.2% during first quarter 2018 from 2017 primarily due to 2017 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.

Capital Expenditures

Capital Expenditures increased 17.4% during first quarter 2018 from 2017 primarily due to the new advanced reformer unit project and the addition of a rail spur at our loading facility.  See additional detail above under "Investing Activities".  We expect the advanced reformer unit to come online in the third quarter 2018 were approximately $2.6 million million compared to $9.4 million in the second quarter 2017 reflecting the completion of 2018.the Advanced Reformer unit project.



Table of Contents
25



Specialty Wax Segment

  2018  2017  Change  %Change 
  (thousands of dollars) 
Product Sales $6,383  $6,508  $(125)  (1.9%)
Processing  3,212   3,155   57   1.8%
Gross Revenue $9,595  $9,663  $(68)  (0.7%)
                 
  Volume of wax sales (thousand pounds)  9,541   10,664   (1,123)  (10.5%)
                 
  Cost of Sales $9,119  $8,566  $553   6.5%
  Gross Margin  5.0%  11.4%  (6.4%)  (56.3%)
  General & Administrative Expense  1,368   1,347   21   1.6%
  Depreciation and Amortization*  1,304   1,016   288   28.3%
  Capital Expenditures $745  $5,125  $(4,380)  (85.5%)
  2018
 2017
 Change
 % Change
  (thousands of dollars)
Product Sales $6,938
 $5,590
 $1,348
 24.1 %
Processing 2,799
 1,959
 840
 42.9 %
Gross Revenue $9,737
 $7,549
 $2,188
 29.0 %
         
Volume of wax sales (thousand pounds) 9,055
 8,036
 1,019
 12.7 %
         
Cost of Sales $9,470
 $8,216
 $1,254
 15.3 %
Gross Margin 2.7% (8.8)% 

 11.6 %
General & Administrative Expense 1,180
 1,107
 73
 6.6 %
Depreciation and Amortization* 1,351
 1,208
 143
 11.8 %
Capital Expenditures $1,094
 $1,991
 $(897) (45.1)%
*Includes $1,282$1,327 and $995$1,187 for 2018 and 2017, respectively, which is included in cost of sales

Product Sales

Product sales revenue increased 24.1% during third quarter 2018 from third quarter 2017 as wax sales volume increased 12.7%. Wax sales were constrained by supply issues for our wax feed. Wax sales continue to be limited by supply constraints as opposed to market demand. Our average wax selling price increased 10% reflecting our marketing strategy to enhance pricing and improve sales mix.  Customer demand continues to be strong for 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 rates.

Processing

Processing revenues increased 42.9% during third quarter 2018 from third quarter 2017. The increase is primarily due to higher revenues from hydrogenation/distillation unit and B Plant. We continue to struggle with the reliability of the hydrogenation/distillation unit and we are implementing modifications to improve its performance. B Plant revenues in third quarter 2018 were about $0.6 million. We have identified significant opportunities for improving our operational efficiency and customer demand for our custom processing capabilities continues to be strong.

Cost of Sales

Cost of Sales increased 15.3% during third quarter 2018 from third quarter 2017, primarily due to higher plant operating expenses including higher costs for labor, maintenance, storage and utilities.

Depreciation

Depreciation increased 11.8% during third quarter 2018 from 2017, primarily due to the hydrogenation/distillation unit coming online in the second and third quarters of 2017.

Capital Expenditures

Capital Expenditures decreased 45.1% during third quarter 2018 from third quarter 2017 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.



Table of Contents
26



Corporate Segment
  2018
 2017
 Change
 % Change
  (in thousands)  
General & Administrative Expense $2,252
 $1,957
 $295
 15.1 %
Equity in losses of AMAK (1,130) (897) (233) (26.0)%
General and Administrative Expenses

General corporate expenses increased during third quarter 2018 from third quarter 2017. The increase is primarily attributable to increased insurance premiums.

Equity in Earnings (Losses) of ContentsAMAK

Equity in earnings (losses) of AMAK increased during third quarter 2018 from third quarter 2017. The equity in losses were impacted primarily as a result of a reduction in AMAK's inventory value for copper and zinc concentrates.

AMAK Summarized Income Statement
  Three Months Ended
September 30,
  2018
 2017
  (thousands of dollars)
Sales $19,877
 $9,709
Cost of sales 20,350
 11,016
Gross operating loss $(473) $(1,307)
General, administrative and other expenses 3,917
 2,382
Net loss $(4,390) $(3,689)
Depreciation and amortization 8,899
 6,214
Net loss before depreciation and amortization $4,509
 $2,525

AMAK continued to make progress in throughput rates, concentrate quality and recoveries. Approximately 17,000 dry metric tons (dmt) of copper and zinc concentrate were shipped in third quarter 2018 as compared to 8,000 dmt of copper and zinc concentrate in third quarter 2017. This is an approximately 17% increase in shipments compared to second quarter 2018. Third quarter net income before depreciation and amortization shows an improvement of approximately $2 million compared to third quarter 2017.




Table of Contents
27



23Comparison of Nine Months Ended September 30, 2018 and 2017

Specialty Petrochemical Segment
  2018
 2017
 Change
 % Change
  (thousands of dollars)
Petrochemical Product Sales 178,094
 147,339
 30,755
 20.9 %
Processing 5,769
 5,078
 691
 13.6 %
Gross Revenue 183,863
 152,417
 31,446
 20.6 %
         
Volume of Sales (gallons)        
Petrochemical Products 64,586
 60,512
 4,074
 6.7 %
Prime Product Sales 50,729
 46,864
 3,865
 8.2 %
         
Cost of Sales 160,543
 122,351
 38,192
 31.2 %
Gross Margin 12.7% 19.7%   (7.0)%
Total Operating Expense* 51,597
 43,161
 8,436
 19.5 %
Natural Gas Expense* 3,841
 3,545
 296
 8.3 %
Operating Labor Costs* 13,351
 11,688
 1,663
 14.2 %
Transportation Costs* 21,528
 18,314
 3,214
 17.5 %
General & Administrative Expense 8,193
 7,914
 279
 3.5 %
Depreciation and Amortization** 6,020
 4,684
 1,336
 28.5 %
Capital Expenditures 16,374
 27,203
 (10,829) (39.8)%
* Included in cost of sales
** Includes $5,528 and $4,142 for 2018 and 2017, respectively, which is included in operating expense

Gross Revenue

Gross Revenue for our Specialty Petrochemical segment increased during the first nine months of 2018 from the first nine months of 2017 by 20.6% primarily due to an increase in sales volume for Petrochemical Products of 6.7%, an increase in the average selling price of 13.2% and an increase in processing revenue of 13.6%.

Petrochemical Product Sales

Petrochemical product sales increased by 20.9% during the first nine months of 2018 from the first nine months of 2017 due to an increase in sales volume of 12.7% and an increase in the average selling price of 8.7%.  Prime product volume increased 8.2% in the first nine months of 2018 as compared to the first nine months 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 impacted by customer issues. These issues tended to resolve in the third quarter, resulting in sequential volume growth. Compared to 2017, we saw good growth for prime products across all major markets. Due to the need to produce additional prime products to support the increase in sales volume, our by-product volume increased 1.5% from 2017.  By-product margins in 2018 increased significantly compared with 2017 a 34% increase in selling prices outpaced the rise in feedstock costs. In third quarter 2018, by-product prices benefited from the start up of the Advanced Reformer, which produces higher value products than the previous process. It should be noted that by-product margins are significantly lower than margins for our prime products.

Our average selling price increased for the first nine months of 2018 for two reasons.  First, by-product selling prices were significantly higher in the first nine months of 2018 compared to the first nine months of 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 about 23% higher in the first nine months of 2018 as compared to the first nine months of 2017.  Additionally, we achieved price increases for the spot portion of our prime products business. Foreign sales volume increased to 26% of total petrochemical volume from 17% in the first nine months of 2017.


Table of Contents
28



Processing

Processing revenues increased 13.6% during the first nine months of 2018 from 2017 due to higher revenues from two custom processing customers.

Cost of Sales

Our Cost of Sales increased 31.2% during the first nine months of 2018 from 2017 primarily due to the increase in feedstock cost as well as higher operating expenses.  Our average feedstock cost per gallon increased 25% compared to the first nine months of 2017, primarily due to an approximately 37% 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 nine months of 2018, feedstock cost per gallon increased steadily month to month and more steeply than the first nine months of 2017. 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 Advanced Reformer unit enables us to convert the less valuable components in our feed into higher value products, thereby allowing us to sell our by-products at higher prices.

The decrease in gross margin from 19.7% to 12.7% was due to higher feedstock and operating expenses.

Total Operating Expense

Total Operating Expense increased 19.5% during the first nine months of 2018 from the same period in 2017.  Labor, transportation and electricity are the largest individual expenses in this category. Labor costs were higher by 14.2% in the first nine months of 2018 from 2017. Labor costs were higher primarily due to overtime, contract labor and maintenance associated with the start-up and commissioning of the Advanced Reformer unit. Certain previously capitalized costs associated with the start-up of the unit were expensed during the nine months ended September 30, 2018. Transportation costs were higher by 17.5% primarily due to an increase in third party freight costs associated with governmental mandates which took effect in the first quarter of 2018, and an increase in the cost of 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 28.5% during the first nine months of 2018 from 2017, primarily due to the commissioning of the Advanced Reformer unit.

Capital Expenditures

Capital Expenditures decreased 39.8% during the first nine months of 2018 from 2017 primarily due to the decline in capital spending for the new Advanced Reformer unit project which was recently completed. See additional detail above under "Investing Activities". 



Table of Contents
29



Specialty Wax Segment
  2018
 2017
 Change
 % Change
  (thousands of dollars)
Product Sales $20,755
 $18,606
 $2,149
 11.6 %
Processing 8,863
 8,142
 721
 8.9 %
Gross Revenue 29,618
 26,748
 2,870
 10.7 %
         
Volume of wax sales (thousand pounds) 29,140
 28,281
 859
 3.0 %
         
Cost of Sales $27,814
 $25,219
 $2,595
 10.3 %
Gross Margin 6.1% 5.7%   0.4 %
General & Administrative Expense 3,787
 3,729
 58
 1.6 %
Depreciation and Amortization* 4,020
 3,233
 787
 24.3 %
Capital Expenditures $2,716
 $12,047
 $(9,331) (77.5)%
*Includes $3,952 and $3,169 for 2018 and 2017, respectively, which is included in cost of sales

Product Sales

Product sales revenue decreased 1.9%increased 11.6% during the first quarternine months of 2018 from the first quarternine months of 2017 as average wax sales were lower dueprice increased approximately 7.6% while wax sales volumes increased 3.0%. In 2018, wax sales continued to be constrained by supply constraintsissues on third party waxes that we distribute in Latin America as well as,and also by limited wax feed supply to our plant. Selling prices for wax benefited from our marketing strategy to enhance pricing and improve sales mix.  As a result, average wax pricing was about 9% higher than the same period a year ago.  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 rates.

Processing

Processing revenues increased 1.8%8.9% during the first quarternine months of 2018 from the first quarter 2017 and nearly 15% from the fourth quarternine months of 2017 when we experienced significant plant operating problems.2017. In the first quarternine months of 2018, we made good progress in correcting operational issues includinghowever the difficulties we experiencedplant continued to struggle with consistently and reliably operating the hydrogenation and distillation unit.  B Plant revenues in the first quarternine months of 2018 were about $1.25$2.4 million a record level since we acquired itcompared to $2.2 million in mid-2016.  Significant opportunities for improving our operational efficiencies remain.the first nine months of 2017.

Cost of Sales

Cost of Sales increased 6.5%10.3% during the first quarternine months of 2018 from the first quarternine months of 2017, primarily due to increases in operations labor, freight, equipmentdepreciation, storage, maintenance storage and utilities.utilities, partially offset by lower wax material costs.

General and Administrative Expense

General and Administrative costs increased 1.6% during first quarter 2018were relatively flat from 2017 primarily due to an increase in our bad debt allowance partially offset by  decreases in other compensation expense, profit sharing and management fees.2017.

Depreciation

Depreciation increased 28.3%24.3% during the first quarternine months of 2018 from 2017, primarily due to the hydrogenation/distillation unit coming online.online in the second and third quarters of 2017.

Capital Expenditures

Capital Expenditures decreased 85.5%77.5% during the first quarternine months of 2018 from the first quarternine months of 2017 primarily due to a decrease in expenditures for construction in progress includingthe completion of the hydrogenation/distillation project.  The project, which came online in the second and third quarters of 2017.

Corporate Segment

  2018  2017  Change  %Change 
  (in thousands)    
General & Administrative Expense $2,147  $2,178  $(31)  (1.4%)
Equity in earnings (losses) of AMAK  230   (966)  1,196   (123.8%)

Table of Contents
30



Corporate Segment
  2018
 2017
 Change
 % Change
  (in thousands)  
General & Administrative Expense $5,234
 $5,978
 $(744) (12.4)%
Equity in losses of AMAK (672) (5,161) 4,489
 87.0 %

General and Administrative Expenses

General corporate expenses decreased slightly during the first quarternine months of 2018 from the first quarternine months of 2017. The decrease is primarily attributable to the cancellation and reversal of stock compensation expense and other post retirement benefits awarded to Mr. Hatem El Khalidi. See further discussion in Note 13 and 19.

Equity in Earnings (Losses)Losses of AMAK

Equity in earnings (losses)losses of AMAK decreased due to increased profitability during the first quarternine months of 2018 fromas compared to the first quarternine months of 2017.


Table of Contents
24






AMAK Summarized Income Statement

  
Three Months Ended
March 31,
 
  2018  2017 
  (thousands of dollars) 
Sales $14,087  $2,256 
         
Gross income (loss)  1,581   (1,307)
General, administrative and other expenses  1,900   2,589 
Net income (loss) $(319) $(3,896)
  Nine Months Ended
September 30,
  2018
 2017
  (thousands of dollars)
Sales $53,458
 $11,965
Cost of sales 49,411
 23,480
Gross operating income (loss) $4,047
 $(11,515)
General, administrative and other expenses 9,083
 6,942
Net loss $(5,036) $(18,457)
Depreciation and amortization 24,881
 16,880
Net income (loss) before depreciation and amortization $19,845
 $(1,577)

AMAK continues to makecontinued significant progress in 2018 in terms of throughput rates, concentrate quality and recoveries.  The precious metals circuit continues to experience downtime issues, and the first gold/silver smelting is now expected next quarter.

Approximately 10,00042,000 dry metric tons (dmt) of copper and zinc concentrate were shipped in the quarterfirst nine months of 2018 as compared to no shipments8,000 dmt of copper and zinc concentrate in the first quarternine months of 2017. The mine incurred a small loss in the quarter but delivered significantly positive EBITDA.Net income before depreciation and amortization shows an improvement of over $21 million year to date compared to 2017.

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

As discussed in Note 1819 to the consolidated financial statements, as a condition of the Loan from the SIDF in the principal amount of 330.0 million SR (US$88.0 million) to AMAK, we were required to execute a Guarantee of up to 41% of the Loan.  The decision to provide a limited corporate guarantee in favor of AMAK was difficult as we considered numerous facts and circumstances.  One of the factors considered was that without the US$88.0 million from the SIDF, construction activity on the project would likely have ceased.  Another factor considered was that prior to making a firm commitment regarding funding, the SIDF performed its own exhaustive due diligence of the project and obviously reached the conclusion that the project is viable and capable of servicing the debt.  Yet another factor considered was our ability to reach agreement with various AMAK Saudi shareholders whereby they agreed to use best efforts to have their personal guarantees stand ahead of and pay required payments to SIDF before our corporate guarantee.  Finally, we researched numerous loans made by the SIDF to others and were unable to find a single instance where the SIDF actually called a guarantee or foreclosed on a project.  Based on the above, we determined that it was in the best interest of the Company and its shareholders to provide the limited corporate guarantee to facilitate completion of the mining project in a timely manner.  We also determined that the stand-in-front agreement in conjunction 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 March 31,September 30, 2018, and December 31, 2017, was 305.0 million Saudi Riyals (US$81.3 million).

Contractual Obligations
Table of Contents
31



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 9 on page 10 of this Form 10-Q for a detailed discussion.
Contractual Obligations

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

Critical Accounting Policies and Estimates

Revenue Recognition

InventoriesThe Company adopted Financial Accounting Standards Board ("FASB") ASC Topic 606 ("ASC 606"),  Revenue from Contracts with Customers and its amendments - Finished productswith a date of the initial application of January 1, 2018. As a result, the Company has changed its accounting policy for revenue recognition as detailed below.  ASC 606 outlines a single comprehensive model for an entity to use in 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 feedstockmost 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 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 Company 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 modified retrospective approach means the Company's comparative periods prior to initial application are recordednot restated. The initial application was applied to all contracts at the lowerdate of cost,the initial application.   The Company has determined that the adjustments using the modified retrospective approach did not have a material impact on the first-in, first-out method (FIFO); or net realizable value for SHR.  For TC, inventory is recorded atdate of the lowerinitial application along with the disclosure of cost or net 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.effect on prior periods.

Table of Contents
25
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, 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 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, 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

See Note 12 to the Consolidated Financial Statements.

Interest Rate Risk
 
See Note 12 to the Consolidated Financial Statements.


Table of Contents
32



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, 2017.

ITEM 4. CONTROLS AND PROCEDURES.

(a)
Evaluation of disclosure controls and procedures. Our Chief Executive Officer and Chief Financial Officer, with the participation of management, have evaluated the effectiveness of our "disclosure controls and procedures" (as defined in Rules 13a-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934) and determined that our disclosure controls and procedures were effective as of the end of the period covered by this report.

(b)
Changes in internal control. There were  no significant changes in our internal control over financial reporting that occurred during the quarternine months ended March 31,September 30, 2018, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Table of Contents
33



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, 2017.


Table of Contents
26
Table of Contents
34



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)*10.1
FirstFourth Amendment to Employment ContractAmended and Restated Credit Agreement, dated as of July 31, 2018, among Texas Oil & Chemical Co. II, Inc., 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, Swingline Lender and L/C Issuer (incorporated by reference to Exhibit 10.1 from Trecora Resources' Current Report on Form 8-K, filed August 1, 2018)
10.2+
Consulting Agreement, dated as of July 1, 2018, between Trecora Resources and Peter Loggenberg, Ph.D.
10(b)*
Consulting Agreement betweenConnie J. Cook (incorporated by reference to Exhibit 10.3 from Trecora Resources and Nicholas N. CarterResources' Quarterly Report on Form 10-Q for the quarter ended June 30, 2018)
31.1**
Certification of Chief Executive Officer pursuant to Rule 13A-14(A)13a-14(a) of the Securities Exchange Act of 1934
31.2**
Certification of Chief Financial Officer pursuant to Rule 13A-14(A)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



Table of Contents
27
Table of Contents
35



SIGNATURES


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



DATE:  May 4,November 6, 2018   TRECORA RESOURCES


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


28
Table of Contents
Table of Contents
36